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Finance

One in five homeowners will struggle with rate rise of less than 0.5%

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ONE in five Australians are walking such a fine mortgage tightrope that they could lose their homes if interest rates rise by even 0.5 per cent.

Our love affair with property has pushed Australia’s residential housing market to an eye-watering value of $6.2 trillion.

But as we scramble over each other to snap up property while interest rates are at historic lows, we have gotten ourselves into a bit of a pickle. We might not actually be able to afford funding our affair.

An analysis, based on extensive surveys of 26,000 Australian households, compiled by Digital Finance Analytics, examined how much headroom households have to rising rates, taking account of their income, size of mortgage, whether they have paid ahead, and other financial commitments. And the results are distressing.

It showed that around 20 per cent — that’s one in five homeowners — would find themselves in mortgage difficulty if interest rates rose by 0.5 per cent or less. An additional 4 per cent would be troubled by a rise between 0.5 per cent and one per cent.

Almost half of homeowners (42 per cent) would find themselves under financial pressure if home loan interest rates were to increase from their average of 4.5 per cent today to the long term average of 7 per cent.

“This is important because we now expect mortgage rates to rise over the next few months, as higher funding costs and competitive dynamics come into pay, and as regulators bear down on lending standards,” Digital Finance Analytics wrote.

The major banks have already started increasing their home loan rates this year, despite the market broadly expecting the Reserve Bank to keep the cash rate steady at 1.5 per cent this year.

Just this week NAB upped a number of its owner-occupied and investment fixed rate loans.

“There are a range of factors that influence the funding that NAB — and all Australian banks — source, so we can provide home loans to our customers,” NAB Chief Operating Officer, Antony Cahill, said of the announcement.

“The cost of providing our fixed rate home loans has increased over recent months.”

So as interest rates rise and leave mortgage holders in its dust, it leaves a huge section of society, and our economy, exposed and at risk.

NOT TERRIBLY SURPRISING

Martin North, Principal of Digital Finance Analytics, said the results are concerning, albeit not surprising.

“If you look at what people have been doing, people have been buying into property because they really believe that it is the best investment. Property prices are rising and interest rates are very low, which means they are prepared to stretch as far as they can to get into the market,” Mr North told news.com.au.

But the widespread assumption that interest rates will remain at historic lows is a disaster waiting to happen, especially in an environment where wage growth is stagnant.

“If you go back to 2005, before the GFC, people got out of jail because their incomes grew a lot faster than house prices, and therefore mortgage costs. But the trouble is that this time around we are not seeing any evidence of real momentum in income growth,” Mr North said.

“My concern is a lot of households are quite close to the edge now — they are not going to get out of jail because their incomes are going to rise. We are in a situation where interest rates are likely to rise irrespective of what the RBA does … There has already been movement up.”

Australia’s wages grew at the slowest pace on record in the three months to September 2016, according to the latest Wage Price Index released by the Australian Bureau of Statistics (ABS).

And as a result Australia’s debt-to-income ratio is astronomical. The ratio of household debt to disposable income has almost tripled since 1988, from 64 per cent to 185 per cent, according to the latest AMP. NATSEM Income and Wealth report.

What this means is that many Australian households are highly indebted, thanks in large part to the property market, without the income growth to pay it down.

“The ratio of debt to income is as high as it’s ever been in Australia and there are some households that are very, very exposed,” Mr North said.

THE YOUNG AND RICH MOST AT RISK

This finding will come as a surprise: young affluent homeowners are the most at risk — it is not just a problem with struggling families on the urban fringe. When it comes to this segment of the market, around 70 per cent would be in difficulty with a 0.5 per cent or less rise. If rates were to hike 3 per cent, bringing them to around the long term average of 7 per cent, nine in ten young affluent homeowners would feel the pressure.

“It is not necessarily the ones you think would be caught. And that’s because they are actually more able to get the bigger mortgage because they’ve got the bigger income to support it.

“They have actually extended themselves very significantly to get that mortgage — they have bought in an area where the property prices are high, they have got a bigger mortgage, they have got a higher LVR [loan-to-valuation ratio] mortgage and they have also got lot of other commitments. They are usually the ones with high credit card debts and a lifestyle that is relatively affluent. They are not used to handling tight budgets and watching every dollar.”

And while the younger wealthy segment of the market being most at risk might not be of that much importance compared to other segments, Mr North said what is concerning is the intense focus on this market.

“Any household group that is under pressure is a problem for the broader economy because if these people are under pressure they are not going to be spending money on retail and the broader economy,” Mr North told news.com.au.

“The banks tend to focus in on what they feel are the lower risk segments and the young affluent sector has actually been quite a target for the lending community in the last 18 months. Be that investment properties or first time owner-occupied properties, my point is there is more risk in that particular sector than perhaps the industry recognises.”

TOUGHER HOME LOAN RESTRICTIONS NEEDED

Now an argument is mounting that Australian banks need to toughen up their approach to home lending.

“I think we have got a situation where the information that is being captured by the lenders is still not robust enough. I am seeing quite often lenders willing to lend what I would regard as relatively sporty bets … I’m questioning whether the underwriting standards are tight enough,” Mr North said.

This includes accepting financial help from relatives for a deposit, a growing trend among first home buyers.

“The other thing that I have discovered in my default analysis is that those who have got help from the ‘Bank of Mum and Dad’ to buy their first property are nearly twice as likely to end up in difficulty … It potentially opens them to more risk later because they haven’t had the discipline of saving.”

News.com.au contacted several banks for comment on whether they think a rethink of their underwriting standards is needed. Only one lender, Commonwealth Bank, agreed to comment, but remained vague on the topic.

“In line with our responsible lending commitments, we constantly review and monitor our loan portfolio to ensure we are maintaining our prudent lending standards and meeting our customers’ financial needs. Buffers and minimum floor rates are used when assessing loan serviceability so it is affordable for customers,” a CBA spokesman said in an emailed statement.

But Mr North said something needs to be done before we find ourselves in a property and economic downturn.

“I’m assuming that with the capital growth we have seen in the property market, it will allow people who get into significant difficulty to be able to get out, however, it’s the feedback concern that I’ve got.

“If you have got a lot of people in the one area struggling with the same situation, you might see property prices begin to slip. If we get the property price slip, and we get unemployment rising and interest rates rising at the same time, we have that perfect storm which would create quite a significant wave of difficulty.

“We need to be thinking now about how to deal with higher interest rates down the track. We can’t just say it will be fine because it won’t be,” he told news.com.au.

 

Originally Published: http://www.goldcoastbulletin.com.au/

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Finance

New postcode restrictions for home loans

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New postcode restrictions for home loans

In a notice issued to mortgage brokers today the CBA announced it will roll out a range of changes including restrictions on lending in some postcodes.

This includes forcing customers to stump up fatter deposits in order to get a home loan.

It will impact all types of properties including homes and apartments and also borrowers regardless of whether they are owner occupiers or investors.

Commbank is rolling out a range of changing which will make it tougher for customers to successfully get a loan.

Commbank is rolling out a range of changing which will make it tougher for customers to successfully get a loan.

In the notice it said from Monday, December 4 the key changes will include:

– Reducing the maximum loan-to-value ratio from 80 to 70 per cent for customers without Lenders Mortgage Insurance (an insurance the customer pays and protects the lender not the borrower.) This means borrowers with a deposit less than 30 per cent must pay expensive LMI costs.

– Reducing the amount of rental income and negative gearing eligible for servicing which will impact investors.

– Change eligibility for Lenders Mortgage Insurance waivers and LMI offers for customers in some postcodes.

Home loan lending with the nation’s largest bank is about to get harder.

Home loan lending with the nation’s largest bank is about to get harder.

CBA said the new Postcode Lookup tool which will start from Monday will allow the bank and brokers to determine whether a borrower can successfully borrow in a particularly region or postcode and it will reduce customers wasting time applying where they are likely to get knocked back on a loan.

CBA has not released the postcodes and regions these changes will impact.

The move is a result of the responsible lending restrictions put on lenders by regulators to cool the red-hot lending market.

Home Loan Experts’ managing director Otto Dargan said these changes are significant and will impact many borrowers.

Home Loan Experts managing director Otto Dargan encourages borrowers to get unconditional approval before buying a property.

Home Loan Experts managing director Otto Dargan encourages borrowers to get unconditional approval before buying a property.

“Lenders keep an eye on the economy and their exposure to different property markets and adjust their lending policies to manage their risks,” he said.

“We strongly recommend that home buyers don’t commit to buy a property until they have an unconditional approval from a bank.

“You could win an auction and then find out that your pre-approval is worthless, and then what are you going to do?”

Unconditional approval is when your loan application has been fully approved and is not subject to any terms or conditions.

Originally Published: www.ipswichadvertiser.com.au

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Finance

New postcode restrictions for home loans

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brisbane

brisbane

THE nation’s largest lender is tightening its belt and making it even tougher for potential borrowers to successfully get a loan.

In a notice issued to mortgage brokers today, the CBA announced it will roll out a range of changes including restrictions on lending in some postcodes.

This includes forcing customers to stump up fatter deposits in order to get a home loan.

It will impact all types of properties including homes and apartments and also borrowers regardless of whether they are owner occupiers or investors.

Commbank is rolling out a range of changing which will make it tougher for customers to successfully get a loan.

Commbank is rolling out a range of changing which will make it tougher for customers to successfully get a loan.

In the notice it said on Monday, December 4 the key changes will include:

– Reducing the maximum loan-to-value ratio from 80 to 70 percent for customers without Lenders Mortgage Insurance (an insurance the customer pays and protects the lender, not the borrower.) This means borrowers with a deposit less than 30 percent must pay expensive LMI costs.

– Reducing the amount of rental income and negative gearing eligible for servicing which will impact investors.

– Change eligibility for Lenders Mortgage Insurance waivers and LMI offers for customers in some postcodes.

Home loan lending with the nation’s largest bank is about to get harder.

Home loan lending with the nation’s largest bank is about to get harder.

CBA said the new Postcode Lookup tool which will start from Monday will allow the bank and brokers to determine whether a borrower can successfully borrow in a particular region or postcode and it will reduce customers wasting time applying where they are likely to get knocked back on a loan.

CBA has not released the postcodes and regions these changes will impact.

The move is a result of the responsible lending restrictions put on lenders by regulators to cool the red-hot lending market.

Home Loan Experts’ managing director Otto Dargan said these changes are significant and will impact many borrowers.

Home Loan Experts managing director Otto Dargan encourages borrowers to get unconditional approval before buying a property.

Home Loan Experts managing director Otto Dargan encourages borrowers to get unconditional approval before buying a property.

“Lenders keep an eye on the economy and their exposure to different property markets and adjust their lending policies to manage their risks,” he said.

“We strongly recommend that home buyers don’t commit to buying a property until they have an unconditional approval from a bank.

“You could win an auction and then find out that your pre-approval is worthless, and then what are you going to do?”

Unconditional approval is when your loan application has been fully approved and is not subject to any terms or conditions.

Originally Published: www.ipswichadvertiser.com.au

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Finance

Suncorp blacklists your Suburb

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suncorp blacklisted suburbs

Big banks are set to announce tougher measures to crack down on high rise apartment purchases including blacklisting more than 100 Brisbane suburbs, doubling the minimum apartment size to qualify for funding, evidence of rental cash flows and tough new valuation criteria.

Lenders such as Adelaide Bank are introducing “minimum funding requirements” requiring apartments to have their own bathrooms, kitchens, laundries and windows in key rooms, such as bedrooms and lounge rooms.

Others, such as Suncorp Bank, the nation’s fifth largest mortgage lender, are circulating a list of 39 Brisbane postcodes covering more than 100 city and metropolitan suburbs where the new lending restrictions will apply from next Monday.

“Our settings have been adjusted for postcodes based on recent weakness in the investment unit market in Brisbane, with evidence of a reduction in prices,” a Suncorp Bank spokesman said.

suncorp restricts lending to local suburbs

McDowall and Everton Parks No 1 rated real estate agent Madeleine Hicks said “suburbs like McDowall, Stafford and Everton Park, are really a victim of what has been happening in neighbouring suburbs Chermside and Nundah.  A lot of units have been built in those suburbs and we are paying the price”

“Whilst there has been some unit development in our main suburbs it has been nothing compared to our neighbours.” said Hicks.

Nervous lenders are turning the screws on apartment buyers amid growing concerns about over-supply, falling prices, restrictions on foreign buyers and potential risk from combustible cladding widely used on high rise apartment exteriors.

For example, new apartment sales in the Queensland capital have reportedly collapsed by more than 70 per cent in a year, prompting desperate developers to offer lucrative incentives to attract buyers.

Developers, such as Consolidate Properties, claim Brisbane has been cruelled by restrictions on financing set up to ease speculative buying in Melbourne and Sydney.

Other developers, such as ForceOne Development, have been using incentives like a free Toyota Yaris to encourage apartment sales.

AdelaideBank, a division of Bendigo and Adelaide Bank, will today (Wed) announce stricter controls on apartment lending that include bigger sizes, better design, identifiable cash flows for investor/lands and more stringent calculations of a borrowers’ capacity to repay.

 On the Plus side

“Now presents a great opportunity for cashed up investors to get into the growing Brisbane market and take advantage of bargains that exist.  We know that the population in Brisbane will continue to increase and that will mean there will always be strong demand for homes in the inner suburbs,” said Madeleine Hicks

In fact Ms Hicks called for “greater investment in infrastructure in the Stafford, McDowall and Everton Park suburbs to better reflect the increase in population that is moving into these suburbs.  This only seems fair as the Council is collecting greater revenues but not spending the money here.”

The Minimum requirements for high density apartments to obtain funding include windows in bedrooms and living rooms, separate bathrooms and their own laundries and kitchens. High density apartments are complexes of more than 50 units or five storeys.

Minimum sizes for two bedroom apartments have been doubled to 60 square metres and timeframes for off-the-plan valuations have been reduced from six to three months to “better the risk” and “align acceptance of applications and valuers’ professional indemnity cover”.

Last month Australia and New Zealand Bank also issued a blacklist imposing tougher terms requiring borrowers to have a 20 per cent deposit.

The value of apartments has fallen by about 1 per cent in Brisbane during the past 12 months, according to SQM Research, which monitors property prices.

Several recent reports by independent consultants have warned demand will be exceeded by the estimated supply of new apartments in Brisbane, which will add to downward pressure on prices.

There is also growing investor concern about the outcome of current investigations into the widespread use of inflammable cladding on apartments, particularly who will be liable for its replacement.

 Under Suncorp’s new rules, it will no longer accept investment loan applications for apartments that do not have a minimum deposit of at least 20 per cent.
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