Bank Bills Enter the Pantheon of Home Loan Financing

Strategic Insights -

Australian investors are increasingly turning to bank bills as a viable alternative to traditional home loan financing, offering the opportunity to navigate interest rate cycles and negotiate favorable terms. According to Andrew Willink of Cannex, bank bills have a typical review cycle of three to five years, during which borrowers can choose to "roll" the bill every 30, 90, or 180 days, depending on their outlook for interest rates.

Key Takeaways:

  • Bank bills are a discount instrument, allowing borrowers to negotiate favorable terms and control the margin.
  • A typical bank bill facility has a review cycle of three to five years, with borrowers able to roll the bill every 30, 90, or 180 days.
  • Commercial bill finance may not be suitable for residential property investments, particularly if longer-term funding is required.
  • Derivatives can be used to hedge short-term interest rate movements, but borrowers must understand the risks, costs, and obligations before entering a contract.
  • The Bank of Queensland will lend up to 80% of a property's value for residential homes, 75% for strata title units, and 60% for industrial properties.
  • Application and establishment fees for bank bills can range from 0.5 to 1.2% and are usually scaled.
  • A line fee, negotiable with the bank, can add to the total cost of a bank bill facility.
  • The rollover benchmarket rate used by banks to set the next rollover can be higher than the actual wholesale rate.

Statistics:

  • 80% - Maximum loan-to-value ratio for residential homes at the Bank of Queensland
  • 75% - Maximum loan-to-value ratio for strata title units at the Bank of Queensland
  • 60% - Maximum loan-to-value ratio for industrial properties at the Bank of Queensland
  • $50,000 - Minimum Borrowing Amount for Derivative Hedging Tools
  • 7.70% - Approximate annual interest rate for the example given
  • $78,881.61 - Net bill amount advanced to the borrower in the example
  • $4473.56 - Total annual interest bill in the example
  • $1600 - Total line fee in the example
  • $6073.56 - Total annual cost in the example

Sources:

  • Andrew Willink, Cannex
  • Rod Goronszy, Commonwealth Bank
  • Bank of Queensland terms and conditions