Many might have noticed bizarre ads featuring inverted Australians, kangaroos on mortgage brochures and even certain (unnamed) financial advisers brandishing “G'day , Cobber” on their website.
The cause of this Antipo-dean overload is the UK arrival of highly flexible and marketable mortgage products developed and imported from Australia.
However, does the Australian mortgage revolutionise the market or simply adjunct consultants' product arsenals? When and for whom is the mortgage suitable? What are the implications for fixed mortgages?
Certainly, some Australian mortgages seemingly confer significant benefits:
Interest is calculated daily or monthly, reflecting changes in the balance owing. This can create significant savings over the life of the mortgage.
Over or underpaying mortgages allows flexibility to suit a client's cash flow and monthly or daily crediting means interest charges are only levied on the reducing loan. Overpaying can drastically reduce the term and interest of the loan.
The ability to drawdown overpayment frees up cash. This can fund school fees, second-home purchase or any other purpose. A borrower only pays interest on the funds owed but still has the facility in reserve.
Payment holidays can be taken if overpayments have been made. This is particularly useful for maternity leave or temporary travel abroad.
Furthermore, the emergence of the Australian mortgage has lead to other flexible products being introduced. Increasingly, mortgage lenders such as Virgin and Britannic Money are offering a current account mortgage which offers the facility to use the mortgage account as a traditional bank account.
Payments and withdrawals are calculated daily and the interest adjusted to reflect the true balance of the account. By timing payment of standing orders and direct debits just before receiving salary, the balance of the loan can be reduced for most of the month, leading to reduced interest payable.
The Intelligent Finance Flexible Current Account Mortgage and the Woolwich Offset allows a borrower to offset any credit balance in savings against the mortgage, credit card or personal loan accounts.
Interest is calculated on the total amount owing less any credit balances. Having savings offsets against funds owing and paying a lower interest figure not only reduces the amount of interest paid but also avoids paying tax on the “savings” as well.
Britannic Money and Legal & General Bank now offer flexible mortgages on their buy-to-let products. The ability to pay in rental amounts and drawdown funds for property repairs or to pay rental tax is a good facility for the private landlord.
It would seem the advantages are overwhelming. Conventional mortgages, with their rigid payment and interest structures, cannot offer such consumer-friendly propositions. Some estimates suggest all lenders will be offering flexible or current account mortgages within two to three years and the majority of mortgage loans will be of this type.
As margins on traditional fixed and discounted rates have fallen in line with low interest rates, lenders relish the opportunity to cross-sell add-on products to the mortgage such as current, savings, credit and personal loan accounts.
Furthermore, mortgage intermediaries will find that procuration fees will fall on loss-leading fixed rate products but remain high on Australian-style mortgages. So does the emergence of Australian flexible mortgages sound the death knell for the conventional mortgage?
The most important consideration is that the Australian mortgage is not for everyone. Such flexibility provides a mixed blessing. The client needs to be self-disciplined to benefit from Australian mortgages.
Since the mortgage account operates similarly to current accounts, allowing withdrawal and deposit, there is temptation to use the account to access extra cash. Although doing this is not inherently disadvantageous, the higher rates charged for Australian mortgages mean the benefits of overpayment are negated. As a result, they are unlikely to benefit first-time buyers who need the security of fixed monthly installments or anyone who finds budgeting difficult.
In fact, the client needs to be making overpayments regularly to truly benefit from these mortgage models. These mortgages are suited to high-net-worth individuals and the affluent segments of the market who are confident they can regularly overpay their installments.
Equally, the mortgage is suitable for variable-income workers – the self-employed or those operating under significant bonus schemes Furthermore, many Australian mortgages are calculated on a standard variable rate, so when rates rise, mortgage payments will increase. Although this seems innocuous in the current environment of low/falling interest rates, over long mortgage lifetimes, extraneous events may force up interest rates.
With the Californian fuel crisis looming, an energy-induced inflationary pressure could, theoretically, repeat the stratospheric inflation of the 1970s. In such an economic atmosphere, fixed-rate mortgages may be a more attractive option.
It would be premature to write off conventional mortgages at this stage. There are indeed many circumstances when conventional mortgages are preferable to flexible products. Equally, Australian mortgages are not the quick-fix solution for all mortgage seekers. Rather, they should be recommended on the basis of a holistic planning approach based on circumstances particular to each client.
However, they provide an alternative to the traditionally available mortgage products and empowering consumers with greater mortgage choice can only be viewed as a positive move.
So, we should stop the koala promotions and gags about tinnies. After all, the Australian or flexible mortgage is just another product to add to the adviser's armoury and sounds neither the end of traditional mortgages nor a brave new world of one-size-fits-all mortgages.
We should leave Australians to do the talking about themselves (they have never been averse to this) and remember that there is never, ever any excuse to mention Christmas on the beach.