ANZ is offering special deals for rich investors but will it work?

A move by ANZ to test special deal mortgages on a minority of wealthy postcodes is being watched closely and if it works, expect the other banks to clamour for the business.

The Melbourne seaside suburb of Brighton is one of the postcodes favoured for “strictly rich” mortgages. Picture: Getty Images

You might call it postcode discrimination and it’s positive discrimination for some. ANZ is testing a mortgage product which offers exclusive terms to Australia’s most affluent depending on where they buy their property.

But will it work? The product arrives in a rapidly changing market where the top end of the residential sector is becoming a world apart. Almost one in four homes in Australia are paid for in cash. In wealthy suburbs, the ratio can go to one in two.

This is the segment with “loads of money” that can buy super luxury homes for occupation or investment and every bank would like a piece of the action.

Remarkably, for all the upheaval in money markets, the Australian mortgage market is set in its ways. In essence there is only one rate that matters, the RBA cash rate, currently sitting at 4.35 per cent.

After that, with some minor exceptions, everyone more or less pays the same rate and investors pay more than owner occupiers.

Now ANZ, backed by new era analytics which can pinpoint creditworthy districts, is testing a “strictly for the rich” mortgage available to just 145 of the nation’s 3333 postcodes. It’s not hard to guess these locales – anything by the water in Sydney; Toorak, Canterbury and Brighton in Melbourne; Ascot and Hamilton in Brisbane; Peppermint Grove and Cottesloe in Perth … you get the idea.

Put simply, you must borrow at least $2m and it can be up to $8m – and mortgage brokers distributing this deal expect you have an income of at least $400,000, which is around four times the national average.

Better still the loans can be interest only.

Interest only (IO) loans were very popular with all buyers when rates were lower and before the regulator stepped in to cool the action. At one stage a decade ago banks were lending more on IO loans than traditional principal and interest. Since then IO loans as a portion of all mortgages have faded significantly.

That’s not because investors don’t want them but because they are hard to get.

That’s why carving out the top end for special treatment is a potential game changer. It could bring Australia into line with overseas markets where private banks have been offering similar deals to the wealthy for years. Indeed it is understood that Singapore Private Bank, Goldman Sachs and HSBC have also been testing the waters in the Australian market.

 

Strictly rich criteria

So how does it work? Assuming your home or residential investment property is in the right postcode, the key to a “mortgage for the rich” is not so much the rates – which will be a tad above the average price in the market – but the super-low deposits these buyers can use to purchase since the bank knows they have deep pockets.

Flint Group chief executive Christian Stevens is participating in the trial. “Typically you would need 20 to 30 per cent deposit to purchase luxury property with big bank lenders; here you would only need $245,000 to buy a $2.5m property,” he says.

In other words you can buy a multimillion-dollar property with a deposit of less than 10 per cent.

What could go wrong?

Certainly interest only deals, which will be the key appeal here, only work when prices are rising. And so far this year the market is rising at a reasonable clip.

But it is uncertain and the top end of the market can be more volatile than the average suburb.

With the revived prospects that rates could actually rise rather than fall in the months ahead, the risks around all property borrowing are changing.

Judo Bank chief economist Warren Hogan now says that instead of cutting rates later this year he expects the RBA will move to lift the cash rate to 5.1 per cent.

Either way, the issue for investors at any end of the market is that rental yields in the cities are very low and the game is heavily dependent on price appreciation. The 1.6 per cent increase in house prices over the first quarter this year have been based on the anticipation of falling interest rates and that anticipation is now seen to be misplaced by a growing number of experts.

Will Hamilton of Hamilton Wealth Partners (a contributor to The Australian) warns all top-end investors to be careful about all bank products aimed exclusively at the affluent.

Discussing the products from private banks in the lead up to ANZ’s big move, he says “always take care that there are not any strings attached; in the past, private banks offered great property lending deals but they often wanted investors to put money into other funds as part of the package”.

Not for everyone

What does the segregation of the mortgage market into “the rich and the rest” mean for all property borrowers?

One thing is for sure: if the ANZ management (which has not been available to comment on the pilot) starts getting ample deal flow from this initiative then all the major banks will be under pressure to join the rush.

One group which will certainly be on the radar for the new loans is ex pats and international investors. A similar mortgage product has been common for year in the UK where the wider London luxury property is heavily underpinned by so called “non doms”.

The British version of these mortgages are aimed slightly higher – at those with about $570,00 or more in annual income. The UK lenders have been sharply criticised for carving out one segment of the market for special treatment.

Critics in the UK say the availability of exclusive interest-only loans – which might never be repaid unless the home is sold – means that the loans were offering some customers a perennial advantage. This criticism intensified after reports they were being effectively passed between generations during inheritance settlements.

Could the same trend occur here? You bet it could.

Julian Finch of Finch Financial operates out of Hurstville, Sydney. He says “the use of postcode data in credit evaluations leads to invisible barriers”.

According to Finch, the other side of the story is that higher risk, less expensive areas are facing inflated rates and stricter deposit requirements, further exacerbating financial disparity.

“It’s like the mortgage market is getting closer to the airline business; it’s splitting into two and some are up the front getting the free pyjamas and the rest are down the back with the kids,” he says.

James Kirby hosts the twice weekly Money Puzzle podcast

Originally published as ANZ is offering special deals for rich investors but will it work?