Credit card users who miss an American Express credit card payment will be hit with higher interest rates.
In an Australian first, American Express is applying a form of risk-rating to its customer base that will result in a sliding scale of rates.
Miss one credit card minimum payment, and you lose any promotional rate you were enjoying.
Miss three payments within 12 months and your current rate increases by 4 per cent per annum.
Miss two consecutive payments, or four separate ones within 12 months, and your rate goes up to 25.99 per cent for at least the next 12 months. At the end of that time, Amex has discretion over whether it will lower your rate.
Effectively, the company is relegating those they assess as high-risk to a punitive rate. Or, in Amex's words, "we are setting credit card rates at the customer level rather than the traditional approach of setting rates by product".
This represents a departure from how credit card interest rates have been set in the past. Until recently, if you missed a payment on your credit card, the worst that could happen was you'd be hit with a flat fee. "We'll see the Australian market move to risk-based pricing over time," predicts Denis Orrock of InfoChoice. "Whether it be through a universal change to the reporting structure, to allow ratings agencies to carry it out, or institutions doing their own risk profiling.
"Consumer groups are concerned vulnerable consumers will be hardest hit by the change. Carolyn Bond of the Consumer Law Centre in Victoria says the new Amex policy goes against the industry trend to responsible lending."Amex is going in the direction of penalising people in financial difficulty, rather than looking at different ways they can assist," Bond says. "If you can't afford your payments at the standard credit card interest rates rate [typically about 17 or 18 per cent], then you're not going to be able to afford them at 26 per cent."Cardholders could be locked into a vicious circle of crippling debt with such high rates.
Defaults of 90 days or more affect a person's credit history. "You start to see real problems emerge," says Dr Nick Coates of the Australian Consumers Association. "Customers struggling to maintain everyday expenses with the [recent] interest rate rise and petrol prices will probably start to load up their credit cards first. We've seen cash-outs and credit card debt before the last rate rise at an all-time monthly high, suggesting there are a lot of people under stress. They're the sorts of consumers who will be caught by a sliding scale."Risk-based pricing is common practice in the US, where lending institutions are allowed considerably more access to credit records than they are in Australia.
"One of the reasons we haven't had more discriminatory rates for credit cards is because it's difficult to price risk at the outset," says Nicola Howell, the director of the Centre for Credit and Consumer Law at Griffith University. "That's one of the arguments for more detailed credit reporting."
Orrock says Amex is in effect conducting its own risk profiling. "What you're seeing is that Amex probably wants to cherry-pick their customer base by separating the good from the bad. This is a pretty easy way to roll your default risk customers up into a fairly aggressive interest rate for one year."
Nina Rinella, an Amex spokeswoman, says the company is simply trying to make sure its customers showing responsible payment behaviour are not subsidising irresponsible customers. "The vast majority of our customers have good payment behaviour, and they're not going to be [affected]," she says. Rinella says that Amex is simultaneously offering 60 per cent of its customers, who pay on time, a reduced rate that could be "as low as 12.99 per cent".
There are still some question marks over Amex's new policy.
The NSW Office of Fair Trading is considering the implications of the new policy under the consumer credit code, which imposes some restrictions on default charges.
The company says it is above board. "American Express sought the advice of several leading barristers who agreed that the policy complies with the consumer credit code," Rinella says."Any change in interest rate resulting from our policy is based on a review of the customer's account history ... [and is] made irrespective of whether the customer is in default at that particular time."
Prior to any interest rate changes we would have communicated to a customer multiple times through letters, statement messages, SMS alerts and/or phone calls," she says.
Coates also cites the Consumer Law Centre of Victoria's 2004 Unfair Fees report, which questioned the legality of excessively high default fees."I'm surprised that [Amex] is looking at this already," he says. "I would have thought that there are some issues to be resolved about so-called penalty fees and penalty rates in Australia before these sliding scales could be introduced." The report argued that if the penalty being charged is disproportionate to the actual administrative costs of default and is coupled with unconscionable contract provisions (such as unfair bargaining power), the fees could be illegal.
No one has challenged the banks in court on late fees yet. But there is evidence of a shift in policy in the United Kingdom, with its Office of Fair Trading recently outlawing sliding scale hikes by imposing a low, flat-rate limit on late fees for credit cards.
Andrew Willink of Cannex doubts that many Australian institutions will follow Amex's policy. He likens it to insurance, where customers who make few or no claims are rewarded with lower premiums (and vice versa). "It's a behaviour rate," he says. "If you behave in a regular pattern according to the contract, you'll benefit from the fact that your interest rate is lower."
But the system will introduce more complexity, he says."With finance products now, fees and interest rates are blurring together, so you don't know [the true cost] - and that's the difficult thing," he says.
Consumer groups are concerned the move may prompt other institutions to introduce similar rate hikes."We don't want to see this system being developed in Australia," Coates says. "We believe that it disadvantages struggling consumers who are over-committed with their debt."To avoid trouble, understand all your credit card terms and conditions."
Make sure you're very aware of what arrangements are in place if you do default," Howell says."Research of behavioural economics indicates that people always take a positive view of how they're going to behave.
They don't expect they're going to default, therefore they don't pay much attention to what the default arrangements are. So be realistic about your credit card use."
Source: The Melbourne Age
Tuesday, October 31, 2006
Monday, October 23, 2006
Home loans grow as UK house prices hit new high.
Mortgage sizes grow as house prices in England and Wales surged an annual 11.5 per cent in October, taking asking prices to a record high, a survey showed today, in a further sign higher borrowing costs have not stifled demand.
The Rightmove house price index showed prices rose 2.0 per cent in October month-on-month, pushing the annual rate to its highest level this year. The figures were not adjusted to take into account seasonal changes in the market.
The asking price for an average house rose to 218,954 pounds (AU$541,232) in October, up from 214,566 in the previous month and beating the previous record of 217,580 pounds set in July.
The Rightmove data is in tune with other surveys showing the housing market shrugging off a Bank of England rate rise to 4.75 per cent in August. Most economists expect benchmark borrowing rates to rise further to 5.0 per cent next month.
"We have never (before) had a sustained low inflation, low interest rate economy combined with widespread home ownership," said Miles Shipside, commercial director at Rightmove, a leading property Web site.
"These unique conditions help push prices higher and higher. However, supply of houses coming onto the market is dropping as prices increase, because fewer home owners can afford to trade up."
Rightmove said the rise in prices was driven by a growing shortage of supply but added many first-time buyers are being priced out of the market given wage rises under five per cent while house price inflation runs above 10 per cent.
Asking prices in London and the southeast continued to lead the pack. Average London prices rose an annual 19 per cent to 335,507 pounds.
City bonuses and a surge in foreign interest have exaggerated gains in London's most desirable boroughs.
Rightmove said the cost of an average home in London's exclusive neighbourhood Kensington and Chelsea.
Source: Reuters
The Rightmove house price index showed prices rose 2.0 per cent in October month-on-month, pushing the annual rate to its highest level this year. The figures were not adjusted to take into account seasonal changes in the market.
The asking price for an average house rose to 218,954 pounds (AU$541,232) in October, up from 214,566 in the previous month and beating the previous record of 217,580 pounds set in July.
The Rightmove data is in tune with other surveys showing the housing market shrugging off a Bank of England rate rise to 4.75 per cent in August. Most economists expect benchmark borrowing rates to rise further to 5.0 per cent next month.
"We have never (before) had a sustained low inflation, low interest rate economy combined with widespread home ownership," said Miles Shipside, commercial director at Rightmove, a leading property Web site.
"These unique conditions help push prices higher and higher. However, supply of houses coming onto the market is dropping as prices increase, because fewer home owners can afford to trade up."
Rightmove said the rise in prices was driven by a growing shortage of supply but added many first-time buyers are being priced out of the market given wage rises under five per cent while house price inflation runs above 10 per cent.
Asking prices in London and the southeast continued to lead the pack. Average London prices rose an annual 19 per cent to 335,507 pounds.
City bonuses and a surge in foreign interest have exaggerated gains in London's most desirable boroughs.
Rightmove said the cost of an average home in London's exclusive neighbourhood Kensington and Chelsea.
Source: Reuters
Home loan lenders in interest rate war for your mortgage business
Home loan lenders want your business now and are prepared to pay for it!
Many major banks are slashing margins to lower the effective mortgage interest rates to attract new home buyers and mortgage refinance business.
Consumer finance research firm Cannex said that lenders had reported cuts to 54 fixed rate mortgages since the beginning of October.
Cannex financial analyst Harry Senlitonga said now may be a good time to consider a fixed rate loan with competition for customers in the increasingly popular fixed market driving lenders to cut rates.
"We are expecting to see more lenders follow in the next few weeks," he said.
Mr Senlitonga said rates had fallen an average 0.12 per cent in three-year fixed mortgages, while the five-year fixed rate category had dropped an average 0.17 per cent.
Fixed rate mortgages have gained popularity since the Reserve Bank of Australia (RBA) raised interest rates in May and August this year, bringing the official interest rate to 6.0 per cent.
Following the latest move, the number of fixed rate loans taken out by owner-occupiers jumped to 20.4 per cent in August from 16.2 per cent in July, according to Australian Bureau of Statistics (ABS) data.
As a result, lenders are now trying to capitalise on the increased demand for fixed rate loans as they scramble for customers in a shrinking market.
The ABS figures showed that both the number of mortgages taken out and the amount borrowed by consumers fell in August, dropping 1 per cent and 1.3 per cent respectively.
RESI Mortgage national consumer advocacy manager Lisa Montgomery said there were some great fixed rates because of the increased competition.
"We are actually seeing that there are a lot of good rates out there for consumers to fix into," Ms Montgomery said.
But she warned borrowers that fixing 100 per cent of their loan may not be the best financial move.
"There needs to be some caution displayed because when you do fix in - someone is going to lose - and it's either going to be the institution or it will be the consumer," she said.
While RBA governor Glenn Stevens said this week that the chances of another interest rate rise were high, most economists believe that rates have neared their peak and some even think rates may begin to come down next year.
"If you are looking to fix in, sit on the fence with perhaps 50 per cent of your loan and keep the other 50 per cent variable," Ms Montgomery said.
She said that by doing this, borrowers effectively had the comfort and piece of mind that came with a fixed rate but also the flexibility to make extra payments, which generally cannot be done with fixed mortgages.
As well, by only fixing part of the loan, borrowers could also take advantage of any potential falls in interest rates.
"So you're actually getting the best of both worlds," she said.
Source AAP
Many major banks are slashing margins to lower the effective mortgage interest rates to attract new home buyers and mortgage refinance business.
Consumer finance research firm Cannex said that lenders had reported cuts to 54 fixed rate mortgages since the beginning of October.
Cannex financial analyst Harry Senlitonga said now may be a good time to consider a fixed rate loan with competition for customers in the increasingly popular fixed market driving lenders to cut rates.
"We are expecting to see more lenders follow in the next few weeks," he said.
Mr Senlitonga said rates had fallen an average 0.12 per cent in three-year fixed mortgages, while the five-year fixed rate category had dropped an average 0.17 per cent.
Fixed rate mortgages have gained popularity since the Reserve Bank of Australia (RBA) raised interest rates in May and August this year, bringing the official interest rate to 6.0 per cent.
Following the latest move, the number of fixed rate loans taken out by owner-occupiers jumped to 20.4 per cent in August from 16.2 per cent in July, according to Australian Bureau of Statistics (ABS) data.
As a result, lenders are now trying to capitalise on the increased demand for fixed rate loans as they scramble for customers in a shrinking market.
The ABS figures showed that both the number of mortgages taken out and the amount borrowed by consumers fell in August, dropping 1 per cent and 1.3 per cent respectively.
RESI Mortgage national consumer advocacy manager Lisa Montgomery said there were some great fixed rates because of the increased competition.
"We are actually seeing that there are a lot of good rates out there for consumers to fix into," Ms Montgomery said.
But she warned borrowers that fixing 100 per cent of their loan may not be the best financial move.
"There needs to be some caution displayed because when you do fix in - someone is going to lose - and it's either going to be the institution or it will be the consumer," she said.
While RBA governor Glenn Stevens said this week that the chances of another interest rate rise were high, most economists believe that rates have neared their peak and some even think rates may begin to come down next year.
"If you are looking to fix in, sit on the fence with perhaps 50 per cent of your loan and keep the other 50 per cent variable," Ms Montgomery said.
She said that by doing this, borrowers effectively had the comfort and piece of mind that came with a fixed rate but also the flexibility to make extra payments, which generally cannot be done with fixed mortgages.
As well, by only fixing part of the loan, borrowers could also take advantage of any potential falls in interest rates.
"So you're actually getting the best of both worlds," she said.
Source AAP
Friday, October 20, 2006
Credit Complaints on the rise
The chief credit industry complaint resolution service wants to make membership to it mandatory for lenders and brokers, following a rise in consumer complaints.
The number of complaints from consumers to the Credit Ombudsman Service (COS) jumped to 766 in 2005/06 from 685 in the previous year, a rise of about 11 per cent.
But most complaints, 526, were directed to non-members of COS. Complaints about COS members actually decreased significantly to 271 in 2005/06 from 397 in 2004/05.
This occurred as the number of contacts to COS rose sharply.
Chairman Graeme Matthews said the increased ratio of inquiries to complaints against its members was evidence of the increased effectiveness of its internal dispute resolution procedures.
Mr Matthews said 92 per cent of complaints received last year were resolved after facilitated negotiation or conciliation between the consumer and COS member.
Only 8 per cent of complaints required a determination by the Credit Ombudsman to resolve the dispute.
Mr Matthews said he is concerned about the growing number of complaints about non-members and called on state governments to make it mandatory for credit companies to join an external dispute resolution scheme like COS.
"Unless each participant is a member of COS or another external dispute resolution scheme, the consumer may be left without a remedy.
"This is clearly unacceptable as it hinders comprehensive coverage of the credit marketplace."
The vast majority of complaints to COS in 2005/06 were about standard loans (77 per cent).
About half of last year's complaints were about brokers and just over a third about lenders.
The biggest cause of complaints was a failure of a credit provider to disclose fees or commissions.
By the end of June 2006, COS had 6517 members, up from 5802 in the previous year.
Source: AAP
The number of complaints from consumers to the Credit Ombudsman Service (COS) jumped to 766 in 2005/06 from 685 in the previous year, a rise of about 11 per cent.
But most complaints, 526, were directed to non-members of COS. Complaints about COS members actually decreased significantly to 271 in 2005/06 from 397 in 2004/05.
This occurred as the number of contacts to COS rose sharply.
Chairman Graeme Matthews said the increased ratio of inquiries to complaints against its members was evidence of the increased effectiveness of its internal dispute resolution procedures.
Mr Matthews said 92 per cent of complaints received last year were resolved after facilitated negotiation or conciliation between the consumer and COS member.
Only 8 per cent of complaints required a determination by the Credit Ombudsman to resolve the dispute.
Mr Matthews said he is concerned about the growing number of complaints about non-members and called on state governments to make it mandatory for credit companies to join an external dispute resolution scheme like COS.
"Unless each participant is a member of COS or another external dispute resolution scheme, the consumer may be left without a remedy.
"This is clearly unacceptable as it hinders comprehensive coverage of the credit marketplace."
The vast majority of complaints to COS in 2005/06 were about standard loans (77 per cent).
About half of last year's complaints were about brokers and just over a third about lenders.
The biggest cause of complaints was a failure of a credit provider to disclose fees or commissions.
By the end of June 2006, COS had 6517 members, up from 5802 in the previous year.
Source: AAP
Bleak time for Tasmania's housing industry as mortgage interest rate rise bites.
There has been a call for the First Home Owners' Grant to be increased to help stem Tasmania's housing industry downturn.
Housing Industry Association state executive director Stuart Clues said climbing mortgage interest rates and high real estate prices were locking Tasmanian first home buyers out of the market. He said forecasts of a 5 per cent fall in housing starts in Tasmania for the coming year would see the situation worsen.
"Tasmania has the lowest percentage of first home buyers entering the market, accounting for 14 to 15 per cent of home loan approvals, compared with 19 per cent in other states," he said.
"Tasmanian families are spending close to 20 per cent of their income on paying the mortgage, when 10 years ago the figure was more like 10 to 12 per cent."
Mr Clues said with a further interest rate increase predicted for November, young families looking to buy their first house were hardest hit.
"The First Home Owners Grant has not increased despite rising house prices and interest rates," he said.
Despite low numbers of first home buyers entering the market, Mr Clues said the HIA's predicted 5 per cent fall in housing starts in Tasmania in 2006-07 was less than predicted for other states.
"New housing starts have fallen by less in Tasmania than in Australia as a whole over the past couple of years," he said.
"Housing starts in Tasmania fell by 9 per cent to a level of 2561 in 2005-06.
"A further fall of 5 per cent will see the cycle bottom at 2444 starts."
However, expenditure on renovations hit a new record high last financial year and is predicted to grow by 6 per cent to $652 million in 2006-07.
The housing industry contributes more than $1 billion a year to Tasmania's economy and renovations are a key factor – about 40 per cent of building work in Tasmania is renovations, compared with 20 per cent in other states.
Housing Industry Association state executive director Stuart Clues said climbing mortgage interest rates and high real estate prices were locking Tasmanian first home buyers out of the market. He said forecasts of a 5 per cent fall in housing starts in Tasmania for the coming year would see the situation worsen.
"Tasmania has the lowest percentage of first home buyers entering the market, accounting for 14 to 15 per cent of home loan approvals, compared with 19 per cent in other states," he said.
"Tasmanian families are spending close to 20 per cent of their income on paying the mortgage, when 10 years ago the figure was more like 10 to 12 per cent."
Mr Clues said with a further interest rate increase predicted for November, young families looking to buy their first house were hardest hit.
"The First Home Owners Grant has not increased despite rising house prices and interest rates," he said.
Despite low numbers of first home buyers entering the market, Mr Clues said the HIA's predicted 5 per cent fall in housing starts in Tasmania in 2006-07 was less than predicted for other states.
"New housing starts have fallen by less in Tasmania than in Australia as a whole over the past couple of years," he said.
"Housing starts in Tasmania fell by 9 per cent to a level of 2561 in 2005-06.
"A further fall of 5 per cent will see the cycle bottom at 2444 starts."
However, expenditure on renovations hit a new record high last financial year and is predicted to grow by 6 per cent to $652 million in 2006-07.
The housing industry contributes more than $1 billion a year to Tasmania's economy and renovations are a key factor – about 40 per cent of building work in Tasmania is renovations, compared with 20 per cent in other states.
Mortgage interest rate rise in November on the cards
The pace of Australia's economic growth is expected to pick up over the next few months, increasing the chances of another mortgage home loan interest rate rise this year, a survey reveals.
The Westpac-Melbourne Institute's leading index of economic activity, which indicates the likely pace of activity three to nine months from now, was rose 0.7 index points in August bringing the annualised rate of growth to 6.1 per cent, compared to 6.5 per cent in July.
Despite the moderation, the result was well above the index's long term trend of 4.1 per cent.
Westpac chief economist Bill Evans said the leading index pointed to strong growth in the economy over the next few months.
"The Reserve Bank has also alluded to surprising strength in tax receipts, which is also pointing to a stronger economy than depicted by the official national accounts that measured the pace of growth over the year to June 2006 as an insipid two per cent."
Mr Evans expects the central bank will lift the official rate by a quarter of a percentage point to 6.25 per cent following a board meeting on November 7.
Mr Evans said growth in the coincident index was being underpinned by rising employment. "Growth in the index has now almost returned to trend following a weak first half of 2006," he said.
"This is pointing to better growth conditions in the second half of 2006. Employment continues to be the real driver of the index."
Mr Evans also forecast economic growth in the second half of this year to pick up to around four per cent, as net exports add to growth for the first time in 19 quarters.
But as non-farm inventories are rebuilt, farm inventories will be drawn down and farm production will fall due to the current drought.
"The impact on growth from the drought could be as severe as 2002/03 when growth was reduced by around one per cent," Mr Evans said.
The index also showed that half of the four monthly components increased in August. Share prices grew by 2.6 per cent while real money supply gained by 0.9 per cent.
However, this was partly offset by a 12.6 per cent drop in dwelling approvals and US industrial production fell by 0.1 per cent.
Three out of the four quarterly components also increased. Overtime worked, core manufacturing material prices, and real corporate gross operating surpluses increased, while the productivity measure declined.
The growth rate of the coincident index, which provides information on a weighted average of six economic series that are typically coincident with economic activity, rose 0.7 index points in August to an annualised 3.1 per cent from 2.8 per cent in June.
Source: AAP
The Westpac-Melbourne Institute's leading index of economic activity, which indicates the likely pace of activity three to nine months from now, was rose 0.7 index points in August bringing the annualised rate of growth to 6.1 per cent, compared to 6.5 per cent in July.
Despite the moderation, the result was well above the index's long term trend of 4.1 per cent.
Westpac chief economist Bill Evans said the leading index pointed to strong growth in the economy over the next few months.
"The Reserve Bank has also alluded to surprising strength in tax receipts, which is also pointing to a stronger economy than depicted by the official national accounts that measured the pace of growth over the year to June 2006 as an insipid two per cent."
Mr Evans expects the central bank will lift the official rate by a quarter of a percentage point to 6.25 per cent following a board meeting on November 7.
Mr Evans said growth in the coincident index was being underpinned by rising employment. "Growth in the index has now almost returned to trend following a weak first half of 2006," he said.
"This is pointing to better growth conditions in the second half of 2006. Employment continues to be the real driver of the index."
Mr Evans also forecast economic growth in the second half of this year to pick up to around four per cent, as net exports add to growth for the first time in 19 quarters.
But as non-farm inventories are rebuilt, farm inventories will be drawn down and farm production will fall due to the current drought.
"The impact on growth from the drought could be as severe as 2002/03 when growth was reduced by around one per cent," Mr Evans said.
The index also showed that half of the four monthly components increased in August. Share prices grew by 2.6 per cent while real money supply gained by 0.9 per cent.
However, this was partly offset by a 12.6 per cent drop in dwelling approvals and US industrial production fell by 0.1 per cent.
Three out of the four quarterly components also increased. Overtime worked, core manufacturing material prices, and real corporate gross operating surpluses increased, while the productivity measure declined.
The growth rate of the coincident index, which provides information on a weighted average of six economic series that are typically coincident with economic activity, rose 0.7 index points in August to an annualised 3.1 per cent from 2.8 per cent in June.
Source: AAP
Low mortgage interest rates drive gain in new home starts
Low mortgage interest rates are boosting the new home buyers and home building companies. The construction of new privately-owned residences increased nearly six percent last month compared to August, according to a joint report by the U.S. Census Bureau and the Department of Housing and Urban Development. The report also showed housing starts to be 19.9 percent below the August 2005 rate.
New home starts have slowed from the unsustainable levels of the last few years but the market has proven to resilient.
As long a long-term mortgage rates remaining low and there is a continued job growth across most industries the housing marketing will be in good shape, especially at the high end of the market.
New home starts have slowed from the unsustainable levels of the last few years but the market has proven to resilient.
As long a long-term mortgage rates remaining low and there is a continued job growth across most industries the housing marketing will be in good shape, especially at the high end of the market.
Friday, October 13, 2006
National Australia Bank to bid for RAMS home loans
The National Australia Bank is said to to in the process of making a bid for Major Non bank home loan mortgage lender RAMS.
Most loans written by RAMS now comme from the mortgage broker channel, and this is of obvious interest to the NAB.
THis move could also give NAB the option of growing their mortgage business through the RAMS franchise model.
In any even Nab would benefit from greater distribution with many RAMS offices in Towns and locations where it is not currently represented.
NAB was one of the first Australian Banks to get into securitiesed lending when it bought into HomeSide in the US, and then brought the mortgage lending brand back to Australia.
And that brings up another question. What would happen to the HomeSide brand?
Most loans written by RAMS now comme from the mortgage broker channel, and this is of obvious interest to the NAB.
THis move could also give NAB the option of growing their mortgage business through the RAMS franchise model.
In any even Nab would benefit from greater distribution with many RAMS offices in Towns and locations where it is not currently represented.
NAB was one of the first Australian Banks to get into securitiesed lending when it bought into HomeSide in the US, and then brought the mortgage lending brand back to Australia.
And that brings up another question. What would happen to the HomeSide brand?
Queensland bank, investment and insurance group Suncorp-Metway looks set to secure one of the largest takeovers in Australian corporate history with its $7.9 billion bid for general insurer Promina Group.
The board of Promina - which owns brands such as AAMI and Australia's Pensioners Insurance Agency - has said it is "favourably disposed" to the conditional offer.
The Brisbane, Queensland based bank, insurance and wealth management group has offered 0.2618 of its shares and $1.80 cash per Promina share, valuing Promina at $7.87 billion.
The news pushed Promina shares into new record territory, with the stock jumping almost 19 per cent to an intraday high of $7.70. The shares were up 66 cents at $7.14 at 1534 AEST.
Suncorp gained 90 cents or 4 per cent to $23.20 by that time.
If approved, it will be the largest takeover in the financial services sector since the Commonwealth Bank's $9.1 billion purchase of Colonial Ltd in 2000.
Outside of that sector, the size of the deal compares with BHP Billiton's $9.2 billion buyout of WMC Resources in 2005.
Both insurers remained tight-lipped about the deal today short of issuing statements confirming the bid, after market speculation about a possible takeover pushed Promina shares more than 6 per cent higher yesterday.
Suncorp has said the merger gives it an expanded national presence, improved geographic diversity and a significant boost to its presence in the wealth management and life insurance markets.
"The proposal is in line with its strategy to pursue value accretive acquisitions which meet its investment criteria, create value for shareholders and enhance earnings per share," Suncorp has said.
The offer brings a sense of confirmation to months of speculation about a round of consolidation among Australia's top four insurers.
However, Suncorp itself was considered one of the more likely takeover targets.
With Promina eager to move ahead with the merger, the companies are progressing with due diligence and negotiations for a formal merger agreement.
But approval from Australian and New Zealand regulators could still remain potential barriers to the acquisition.
CommSec analyst Carlos Castillo has said there are unlikely to be many rival bids emerging from the woodwork with competition constraints likely to keep most players at bay.
"This has been something that's been in the pipeline for quite a while," he said.
"It's (the market) obviously not factoring anyone else coming in and making a bigger offer and trumping Suncorp.
"I think that's pretty unlikely because Suncorp is the one that can extract the most synergies out of an acquisition of Promina.
"Any other potential bidders, if they want to pay more, then they're really going to be doing so for strategic reasons not because they feel they can get more value out of the acquisition than Suncorp."
The move will have ramifications for the broader financial sector with Insurance Australia Group (IAG) - Australia's second largest insurer by earned premium behind QBE - standing to benefit from the transaction.
"If this takeover goes ahead then it's hard to see anyone being able to buy IAG without further competition concerns being raised unless they're an offshore person who has no participation in the market at the moment," Mr Castillo said.
Deutsche Bank analyst James Coghill has said the disruption a merger is likely to cause Promina and Suncorp would improve IAG's attractiveness in the medium-term.
"In terms of alternative bids, we see limited scope given competition constraints for IAG, and lower synergy potential from QBE, Wesfarmers and Allianz," Mr Coghill said.
"Furthermore, both QBE and Allianz have the ability to acquire offshore at more attractive multiples."
Bank of Queensland managing director David Liddy has said the merger is good news for his bank.
"It's a positive from our point of view, we stick to the view that we are a bank and what we are trying to do is get more Bank of Queensland customers in Queensland," he said.
Mr Liddy has said the regional bank performed well after Suncorp's $1.26 billion acquisition of general insurance business GIO from AMP in 2001.
Source: AAP
The board of Promina - which owns brands such as AAMI and Australia's Pensioners Insurance Agency - has said it is "favourably disposed" to the conditional offer.
The Brisbane, Queensland based bank, insurance and wealth management group has offered 0.2618 of its shares and $1.80 cash per Promina share, valuing Promina at $7.87 billion.
The news pushed Promina shares into new record territory, with the stock jumping almost 19 per cent to an intraday high of $7.70. The shares were up 66 cents at $7.14 at 1534 AEST.
Suncorp gained 90 cents or 4 per cent to $23.20 by that time.
If approved, it will be the largest takeover in the financial services sector since the Commonwealth Bank's $9.1 billion purchase of Colonial Ltd in 2000.
Outside of that sector, the size of the deal compares with BHP Billiton's $9.2 billion buyout of WMC Resources in 2005.
Both insurers remained tight-lipped about the deal today short of issuing statements confirming the bid, after market speculation about a possible takeover pushed Promina shares more than 6 per cent higher yesterday.
Suncorp has said the merger gives it an expanded national presence, improved geographic diversity and a significant boost to its presence in the wealth management and life insurance markets.
"The proposal is in line with its strategy to pursue value accretive acquisitions which meet its investment criteria, create value for shareholders and enhance earnings per share," Suncorp has said.
The offer brings a sense of confirmation to months of speculation about a round of consolidation among Australia's top four insurers.
However, Suncorp itself was considered one of the more likely takeover targets.
With Promina eager to move ahead with the merger, the companies are progressing with due diligence and negotiations for a formal merger agreement.
But approval from Australian and New Zealand regulators could still remain potential barriers to the acquisition.
CommSec analyst Carlos Castillo has said there are unlikely to be many rival bids emerging from the woodwork with competition constraints likely to keep most players at bay.
"This has been something that's been in the pipeline for quite a while," he said.
"It's (the market) obviously not factoring anyone else coming in and making a bigger offer and trumping Suncorp.
"I think that's pretty unlikely because Suncorp is the one that can extract the most synergies out of an acquisition of Promina.
"Any other potential bidders, if they want to pay more, then they're really going to be doing so for strategic reasons not because they feel they can get more value out of the acquisition than Suncorp."
The move will have ramifications for the broader financial sector with Insurance Australia Group (IAG) - Australia's second largest insurer by earned premium behind QBE - standing to benefit from the transaction.
"If this takeover goes ahead then it's hard to see anyone being able to buy IAG without further competition concerns being raised unless they're an offshore person who has no participation in the market at the moment," Mr Castillo said.
Deutsche Bank analyst James Coghill has said the disruption a merger is likely to cause Promina and Suncorp would improve IAG's attractiveness in the medium-term.
"In terms of alternative bids, we see limited scope given competition constraints for IAG, and lower synergy potential from QBE, Wesfarmers and Allianz," Mr Coghill said.
"Furthermore, both QBE and Allianz have the ability to acquire offshore at more attractive multiples."
Bank of Queensland managing director David Liddy has said the merger is good news for his bank.
"It's a positive from our point of view, we stick to the view that we are a bank and what we are trying to do is get more Bank of Queensland customers in Queensland," he said.
Mr Liddy has said the regional bank performed well after Suncorp's $1.26 billion acquisition of general insurance business GIO from AMP in 2001.
Source: AAP
Thursday, October 12, 2006
Reverse Mortgages. Are they a cause for concern for our aged?
vphSeveral consumer groups are calling for better protection for aged homeowners being sold reverse mortgages to fund their retirement.
Australia's ageing population are mostly asset rich but cash poor. And most have one asset that has doubled or trebled in value in the last few years, and that’s the family home.
Reverse mortgages have been available in the US for decades, and some banks tried to market them in Australia in the nineties with limited success.
Their time and need has now come, as the cash strapped baby boomers head to retirement with little superannuation or other assets to support them in retirement.
In 2004, about $250 million was lent through reverse mortgages. Last year, it was $650 million. According to Kieran Dell, executive director of the industry body Senior Australians Equity Release Association of Lenders (SEQUAL), that's just the beginning.
"It wouldn't surprise me if it exceeded a billion dollars in this calendar year," he says, adding that it could reach up to $5 billion in the next few years.
"You won't see the rump of those baby boomers hitting retirement and then spending their superannuation for another 10 years. So it's going from a small base but it is growing very fast."
But the Australian Consumers Association has called for regulation of the sector, concerned that pushy selling practices could put them in an unfair position.
Launched during the boom when house values were screaming up, many property markets are now falling while interest rates are rising.
"Reverse mortgages are an emotive issue," says Denis Orrock, the general manager of InfoChoice.
"Slogans such as 'nothing to pay till you die' hardly aid the industry's quest for recognition as a legitimate financial tool for senior citizens."
Horror stories from Britain of aged pensioners being evicted from their homes as their reverse mortgage debt exceeded the homes' value stalled the market here in the 1980s. Yet new demographics and lifestyle considerations are pushing more people to consider going back into debt.
Life expectancy is longer, lifestyle expectations are higher and Australia's ageing population needs more money to live on. There are a lot of retirees who own their own homes and many who are under-funded for retirement. People leaving the workforce now have an average of only $125,000 in super, so borrowing against the family home can look like an attractive option.
But in doing so, borrowers take on a major risk. In an environment of sluggish property growth and higher interest rates, the debt compounds rapidly and may leave once-secure home owners with little to call their own or pass on to their beneficiaries.
Depending on how the funds are accessed, Centrelink may assess the money under the income test and reduce the age pension.
Any mortgage broker can sell a reverse mortgage, whether or not they submit to an Australian Securities and Investments Commission-approved dispute resolution system such as the Banking and Financial Services Ombudsman. Sales are commission-based, which means the bigger the loan, the greater the broker fee. Commission figures are closely guarded, but those the ACA knows about average from 1.2 to 2.3 per cent. If there is a combination of an upfront commission and a trail fee, the inital fee may be 0.7 to 1 per cent and the ongoing trail 0.2 to 0.4 per cent.
"You don't want a situation where inappropriate advice is given by a broker or a planner because of the size of the commission they're earning," says Nick Coates, an ACA senior policy officer.
In the absence of regulation, best practice in the area is guided by a voluntary industry code developed by SEQUAL, which represents about 95 per cent of providers. It requires members to include a no-negative equity guarantee in their contracts. This is meant to ensure that no one will lose their home over a reverse mortgage.
Because it's a voluntary code, a proven breach doesn't carry the force of law. The penalty is expulsion from SEQUAL or, as Dell puts it "a public relations disaster".
But the equity guarantee is not iron-clad. It is conditional on a borrower meeting all the terms and conditions of the loan, which may include, for example, maintenance and regular home valuations at the borrower's cost.
"We still have concerns that there are ways in which the contracts can avoid a no-negative-equity guarantee if the customer was found to be in default," Coates says.
"If you hadn't done some simple administrative tasks like paid your council rates or reported on the state of your property each year you could technically be in default, which means they could reserve the right to say the [guarantee] doesn't apply.
"Most financial institutions when questioned about that say, we're reasonable and won't apply it. Sure, they may well be reasonable but it still provides a gap for those that aren't reasonable. There's no guarantee."
The products are complicated, and many borrowers have trouble understanding all their ramifications. Dianne Carmody, general manager, Banking and Financial Services Ombudsman, says it has received only a small handful of complaints relating to reverse mortgages from SEQUAL members but all related to borrowers misunderstanding the terms and conditions.
Paul Gillett, a solicitor with the Consumer Legal Service in Victoria, has had many calls from clients who don't understand the products. "They're a relatively new product and people are prone to misunderstanding their nature," he says. "The negative side is that providers may be taking advantage of people in this regard."
SEQUAL's code requires people to consult a lawyer, and strongly encourages them to seek licensed financial advice and to talk to their beneficiaries as well. The association argues that making financial advice mandatory could actually disadvantage certain people. Some consumer groups agree, concerned that unscrupulous planners may push higher loan amounts or products people don't need. In addition, the financial advice would be yet another cost borne by the borrower.
With reverse mortgages, it's a case of borrower beware. "The borrower needs to understand the structure of the loan, the impact it may have on future equity and the impact it will have on their estate,'" Orrock says. "They also need to ensure that they only draw down the amount they require and not be coerced into taking a large lump sum.
"The lenders should at all times provide the borrower with an accurate picture as to how the loan will perform under conservative conditions moderate property growth and a higher interest rate environment. This will ensure the borrower can understand the concept of capitalisation of interest.
"Finally, the borrower needs to seek independent legal and financial advice."
Impact on Centrelink benefitsThe first $40,000 is not counted as an asset for 90 days. If the money is placed into a bank account, it is subject to the deeming provisions of the income test. Where more than $40,000 is borrowed, the amount in excess is counted as an asset with the $40,000 being counted after 90 days. If the whole amount is immediately spent, the rule will not apply unless the funds are spent on assets or an income stream. Where the loan is drawn down on a regular basis there is no effect on the income. Some reverse mortgage providers offer regular payments by holding the proceeds of the loan in an offset account. The balance of the account is classed as an asset and subject to the deeming provisions but the interest charged on the loan may be reduced.
Source: The Institute of Chartered Accountants in Australia
Australia's ageing population are mostly asset rich but cash poor. And most have one asset that has doubled or trebled in value in the last few years, and that’s the family home.
Reverse mortgages have been available in the US for decades, and some banks tried to market them in Australia in the nineties with limited success.
Their time and need has now come, as the cash strapped baby boomers head to retirement with little superannuation or other assets to support them in retirement.
In 2004, about $250 million was lent through reverse mortgages. Last year, it was $650 million. According to Kieran Dell, executive director of the industry body Senior Australians Equity Release Association of Lenders (SEQUAL), that's just the beginning.
"It wouldn't surprise me if it exceeded a billion dollars in this calendar year," he says, adding that it could reach up to $5 billion in the next few years.
"You won't see the rump of those baby boomers hitting retirement and then spending their superannuation for another 10 years. So it's going from a small base but it is growing very fast."
But the Australian Consumers Association has called for regulation of the sector, concerned that pushy selling practices could put them in an unfair position.
Launched during the boom when house values were screaming up, many property markets are now falling while interest rates are rising.
"Reverse mortgages are an emotive issue," says Denis Orrock, the general manager of InfoChoice.
"Slogans such as 'nothing to pay till you die' hardly aid the industry's quest for recognition as a legitimate financial tool for senior citizens."
Horror stories from Britain of aged pensioners being evicted from their homes as their reverse mortgage debt exceeded the homes' value stalled the market here in the 1980s. Yet new demographics and lifestyle considerations are pushing more people to consider going back into debt.
Life expectancy is longer, lifestyle expectations are higher and Australia's ageing population needs more money to live on. There are a lot of retirees who own their own homes and many who are under-funded for retirement. People leaving the workforce now have an average of only $125,000 in super, so borrowing against the family home can look like an attractive option.
But in doing so, borrowers take on a major risk. In an environment of sluggish property growth and higher interest rates, the debt compounds rapidly and may leave once-secure home owners with little to call their own or pass on to their beneficiaries.
Depending on how the funds are accessed, Centrelink may assess the money under the income test and reduce the age pension.
Any mortgage broker can sell a reverse mortgage, whether or not they submit to an Australian Securities and Investments Commission-approved dispute resolution system such as the Banking and Financial Services Ombudsman. Sales are commission-based, which means the bigger the loan, the greater the broker fee. Commission figures are closely guarded, but those the ACA knows about average from 1.2 to 2.3 per cent. If there is a combination of an upfront commission and a trail fee, the inital fee may be 0.7 to 1 per cent and the ongoing trail 0.2 to 0.4 per cent.
"You don't want a situation where inappropriate advice is given by a broker or a planner because of the size of the commission they're earning," says Nick Coates, an ACA senior policy officer.
In the absence of regulation, best practice in the area is guided by a voluntary industry code developed by SEQUAL, which represents about 95 per cent of providers. It requires members to include a no-negative equity guarantee in their contracts. This is meant to ensure that no one will lose their home over a reverse mortgage.
Because it's a voluntary code, a proven breach doesn't carry the force of law. The penalty is expulsion from SEQUAL or, as Dell puts it "a public relations disaster".
But the equity guarantee is not iron-clad. It is conditional on a borrower meeting all the terms and conditions of the loan, which may include, for example, maintenance and regular home valuations at the borrower's cost.
"We still have concerns that there are ways in which the contracts can avoid a no-negative-equity guarantee if the customer was found to be in default," Coates says.
"If you hadn't done some simple administrative tasks like paid your council rates or reported on the state of your property each year you could technically be in default, which means they could reserve the right to say the [guarantee] doesn't apply.
"Most financial institutions when questioned about that say, we're reasonable and won't apply it. Sure, they may well be reasonable but it still provides a gap for those that aren't reasonable. There's no guarantee."
The products are complicated, and many borrowers have trouble understanding all their ramifications. Dianne Carmody, general manager, Banking and Financial Services Ombudsman, says it has received only a small handful of complaints relating to reverse mortgages from SEQUAL members but all related to borrowers misunderstanding the terms and conditions.
Paul Gillett, a solicitor with the Consumer Legal Service in Victoria, has had many calls from clients who don't understand the products. "They're a relatively new product and people are prone to misunderstanding their nature," he says. "The negative side is that providers may be taking advantage of people in this regard."
SEQUAL's code requires people to consult a lawyer, and strongly encourages them to seek licensed financial advice and to talk to their beneficiaries as well. The association argues that making financial advice mandatory could actually disadvantage certain people. Some consumer groups agree, concerned that unscrupulous planners may push higher loan amounts or products people don't need. In addition, the financial advice would be yet another cost borne by the borrower.
With reverse mortgages, it's a case of borrower beware. "The borrower needs to understand the structure of the loan, the impact it may have on future equity and the impact it will have on their estate,'" Orrock says. "They also need to ensure that they only draw down the amount they require and not be coerced into taking a large lump sum.
"The lenders should at all times provide the borrower with an accurate picture as to how the loan will perform under conservative conditions moderate property growth and a higher interest rate environment. This will ensure the borrower can understand the concept of capitalisation of interest.
"Finally, the borrower needs to seek independent legal and financial advice."
Impact on Centrelink benefitsThe first $40,000 is not counted as an asset for 90 days. If the money is placed into a bank account, it is subject to the deeming provisions of the income test. Where more than $40,000 is borrowed, the amount in excess is counted as an asset with the $40,000 being counted after 90 days. If the whole amount is immediately spent, the rule will not apply unless the funds are spent on assets or an income stream. Where the loan is drawn down on a regular basis there is no effect on the income. Some reverse mortgage providers offer regular payments by holding the proceeds of the loan in an offset account. The balance of the account is classed as an asset and subject to the deeming provisions but the interest charged on the loan may be reduced.
Source: The Institute of Chartered Accountants in Australia
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