While the official interest rate remains at a historical low, banks are likely to raise mortgage rates out of cycle yet again. Homeowners were hit by an out of cycle rate hike in November last year as banks responded to offset costs related to requirements of holding more capital as a compensating factor to home lending, for absorption of any potential losses. This year, the hike is expected regardless of what the Reserve Bank of Australia (RBA) might do with any possible measures. Homeowners are therefore projected to be carefully weighing their options, to see if there is a way they can protect themselves against the expected hikes to the extent that would be possible.
Funding cost pressures Funding costs have been rising and the mortgage market is experiencing the pressure of strict capital requirements. RBA’s regulatory moves to curb the growth of landlord lending is also factoring into the equation. Banks are left with no other options to cushion themselves against higher funding costs other than biting the bullet and hiking the rates out of the cycle. The biggest banks so far have led the way in increasing costs affecting investors and owner-occupiers alike.
Higher variable mortgage rates In the light of the unfolding situation in the home lending market, variable mortgage rates will definitely become less attractive. Since generally rates have been at their lowest level before the first out of cycle hike hit in November, they can only be expected to rise going forward. So there are obviously few or no chances of benefiting from the variable rates when the situation is also quite volatile. Average variable rates at the moment are higher than the average fixed rates, so experts are advising borrowers to fix part of their home loans if not all of it.
Attractive fixed mortgage rates Within the first 3 months in 2016, fixed rates have attracted more lending opportunities. That’s what a report from the Australian Finance Group suggests. So the March Quarter recorded 17.7% increase of borrowers opting for fixed rates, compared to the 11.4% recorded in the previous quarter. The trend only indicates that borrowers want to lock in the fixed rates within their lowest levels. The risk of doing so at the moment is small considering the attractive fixed rates available from most lenders. The historical lows of these rates are expected to gradually disappear in the coming months.
Alternative lending options With mortgage rates from regular banks expected to rise in the coming months, it makes sense to consider alternative sources of home loans. Non-bank lenders can be more flexible with their rates and fees because that is one of their main strategies for competing with regular banks.
Although this type of lenders do not provide as many products as banks, their home loans could certainly become more attractive for anyone looking to avoid the high rates expected to hit the mortgages market. Banks sell wholesale funds to non-bank lenders who in turn package them for borrowers. They effectively minimise costs and overheads to beat the rates offered by the banks.
The Panama papers leaks brought into the limelight one of the world’s biggest economic scandals. The leaks provided 11.5 million files with 2.6 terabytes of information obtained from Mossack Fonseca’s database by Anonymous hackers. The scandal came to the attention of the world through the International Consortium of Investigative Journalists (ICIJ) that shared it with major international media networks. Mossack Fonseca, the Panamanian law firm at the centre of this particular scandal claims that its services are above board. But their clandestine operations confirmed through the leaked documents have been linked to about 143 politicians, 12 of them national leaders including Vladimir Putin and the Icelandic prime minister, Gunnlaugsson. These rich individuals take advantage of tax havens like Panama, Cayman Islands, or anywhere no serious regulations exist to control the offshore finance industry especially regarding tax compliance.
The Panama papers leaks reveals how big the offshore wealth management industry has become, and thrives on helping the rich to hide their wealth while potentially evading taxes or even laundering money. Many choose not to declare ownership of their offshore companies, so most of the wealth created in such environments where operations are shrouded in secrecy easily avoid paying. David Cameron has been a tax-evasion crusader, targeting to have the owners and tax compliance status of offshore companies linked to Switzerland, Singapore, and other tax havens known to authorities in the UK. But he may just have lost any trust earned after being linked to the scandal through his father’s offshore trust in Panama. He now admits to have profited from that offshore trust, although after the leaks his answers on the matter were not straightforward.
Creating an offshore company in any of the tax havens isn’t necessarily illegal. It depends on whether an individual does it for the right reasons. If done purely to protect business plans or brand identity, without any tax evasion, it’s legal. But some wealthy individuals take advantage of tax secrecy, so that they can choose not to declare their offshore wealth. In this case, Mossack Fonseca like many other law firms thriving in tax havens helps these rich individuals or their family members to create shell companies through which their financial assets can escape taxation. Without strict regulation, some offshore companies can easily be setup for all manner of illegal operations including money laundering.
When the rich hide their wealth in tax havens, poor citizens are forced to shoulder the tax burden because they will have to pay more taxes. The financial systems of the countries deprived of the taxes may also be seriously affected. The balance sheets of the exchequers will obviously have some issues that can be explained by the undeclared offshore wealth. It is estimated that about $8 trillion of wealth worldwide is hidden in tax havens. The Panama leaks triggered a protest in Iceland which made Gunnlaugsson to bow to the pressure and resigned after a meeting with his party. Reports indicate that the few Russians who dared protest and called for the resignation of Vladimir Putin were immediately arrested. The Russian president has been linked to an offshore trail of $2 billion through his associates though he dismissed the claims days later.
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