Almost $40 billion in loans default or are overdue for the quarter: APRA

Almost $40 billion in loans default or are overdue for the quarter: APRA

Almost $40 billion in loans is either overdue or can’t be paid back to banks in the most recent quarter, according to the financial regulator, and that number would’ve been higher had it included the bulk of deferred mortgages. 

The Australian Prudential and Regulation Authority (APRA) released statistics on the banking sector’s health covering the quarter ending June 2020. Among an otherwise ordinary report card was a statistic on loan defaults and overdue payments. 

Impaired assets and past due items for key non-performing loans had increased to $39.1 billion in the three months until June, an increase of 26.1 per cent compared to the same period a year earlier.

A footnote acknowledged the fallout could’ve been worse was it not for the mortgage deferrals instituted by financial regulators and the banks.

“Total impaired facilities, past due items and specific provisions, as well as the proportion of these indicators to gross loans and advances, have all increased from their levels in the June 2019 quarter,” APRA said in its report.
 
“... Further deterioration is expected over the next 6 to 12 months given rising unemployment and unwinding of COVID-19 support packages.”

The figure offers a clearer idea of the economic fallout brought by the COVID-19 pandemic and the health restrictions instituted to curb its spread.

About 900,000 loans have had their repayments deferred, according to the Australian Banking Association, amounting to $266 billion.

Banks are beginning the process of contacting half of these borrowers to see if they’ve regained their financial footing to resume mortgage repayments.

Mortgage repayments are up: APRA

Government measures and weakened consumer spending have helped people make their mortgage repayments, APRA said. 

Repayments made into offset mortgage accounts increased by $178.2 billion in June 2020 -- a rise of 12.4 per cent compared to the same time a year earlier.

Past due loans increased for both owner occupier and investor mortgages to 1.1 per cent, APRA said, though investor mortgages covered fractionally more ground to do so.

Residential loans 30 to 89 days past due -- but not impaired -- increased to $13.9 billion in the June 2020 quarter, a rise of 0.6 per cent over the same period a year earlier. 

However, compared to the March quarter it followed, it represented a fall of 6.4 per cent.

Mortgages are well covered: APRA

For the remaining mortgages outstanding, APRA said they’re “well covered by collateral”.

About 79 per cent of mortgages had a loan to value ratio (LVR) below 80 per cent, while 4.8 per cent had an LVR of 90 per cent. These June quarter figures were the same as those in March.

Interest only loans however continued to decrease to 16.2 per cent -- a drop of 5.5 per cent over the same period last year.

‘A material reduction in cash and liquid assets’: APRA

The combined performance of the 146 Authorised Deposit-taking Institutions (ADI’s, commonly known as banks) experienced a drop over the June quarter. 

Assets fell by 4.8 per cent to $5.3 trillion, APRA said, due to a "material reduction in cash and liquid assets, gross loans and advances, and other assets".

The drop wasn’t significant enough to offset the year’s performance; total assets were up by 8.9 per cent over the financial year ending in 2020.

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Learn more about home loans

Does Australia have no-deposit home loans?

Australia no longer has no-deposit home loans – or 100 per cent home loans as they’re also known – because they’re regarded as too risky.

However, some lenders allow some borrowers to take out mortgages with a 5 per cent deposit.

Another option is to source a deposit from elsewhere – either by using a parental guarantee or by drawing out equity from another property.

What are the pros and cons of no-deposit home loans?

It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.

The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.

But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.

What is mortgage stress?

Mortgage stress is when you don’t have enough income to comfortably meet your monthly mortgage repayments and maintain your lifestyle. Many experts believe that mortgage stress starts when you are spending 30 per cent or more of your pre-tax income on mortgage repayments.

Mortgage stress can lead to people defaulting on their loans which can have serious long term repercussions.

The best way to avoid mortgage stress is to include at least a 2 – 3 per cent buffer in your estimated monthly repayments. If you could still make your monthly repayments comfortably at a rate of up to 8 or 9 per cent then you should be in good position to meet your obligations. If you think that a rate rise would leave you at a risk of defaulting on your loan, consider borrowing less money.

If you do find yourself in mortgage stress, talk to your bank about ways to potentially reduce your mortgage burden. Contacting a financial counsellor can also be a good idea. You can locate a free counselling service in your state by calling the national hotline: 1800 007 007 or visiting www.financialcounsellingaustralia.org.au.

How much debt is too much?

A home loan is considered to be too large when the monthly repayments exceed 30 per cent of your pre-tax income. Anything over this threshold is officially known as ‘mortgage stress’ – and for good reason – it can seriously affect your lifestyle and your actual stress levels.

The best way to avoid mortgage stress is by factoring in a sizeable buffer of at least 2 – 3 per cent. If this then tips you over into the mortgage stress category, then it’s likely you’re taking on too much debt.

If you’re wondering if this kind of buffer is really necessary, consider this: historically, the average interest rate is around 7 per cent, so the chances of your 30 year loan spending half of its time above this rate is entirely plausible – and that’s before you’ve even factored in any of life’s emergencies such as the loss of one income or the arrival of a new family member.

How can I avoid mortgage insurance?

Lenders mortgage insurance (LMI) can be avoided by having a substantial deposit saved up before you apply for a loan, usually around 20 per cent or more (or a LVR of 80 per cent or less). This amount needs to be considered genuine savings by your lender so it has to have been in your account for three months rather than a lump sum that has just been deposited.

Some lenders may even require a six months saving history so the best way to ensure you don’t end up paying LMI is to plan ahead for your home loan and save regularly.

Tip: You can use RateCity mortgage repayment calculator to calculate your LMI based on your borrowing profile

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

Can I get a home loan if I am on an employment contract?

Some lenders will allow you to apply for a mortgage if you are a contractor or freelancer. However, many lenders prefer you to be in a permanent, ongoing role, because a more stable income means you’re more likely to keep up with your repayments.

If you’re a contractor, freelancer, or are otherwise self-employed, it may still be possible to apply for a low-doc home loan, as these mortgages require less specific proof of income.

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.

Is there a limit to how many times I can refinance?

There is no set limit to how many times you are allowed to refinance. Some surveyed RateCity users have refinanced up to three times.

However, if you refinance several times in short succession, it could affect your credit score. Lenders assess your credit score when you apply for new loans, so if you end up with bad credit, you may not be able to refinance if and when you really need to.

Before refinancing multiple times, consider getting a copy of your credit report and ensure your credit history is in good shape for future refinances.

I have a poor credit rating. Am I still able to get a mortgage?

Some lenders still allow you to apply for a home loan if you have impaired credit. However, you may pay a slightly higher interest rate and/or higher fees. This is to help offset the higher risk that you may default on your repayments.

I can't pick a loan. Should I apply to multiple lenders?

Applying for home loans with multiple lenders at once can affect your credit history, as multiple loan applications in short succession can make you look like a risky borrower. Comparing home loans from different lenders, assessing their features and benefits, and making one application to a preferred lender may help to improve your chances of success

Will I be paying two mortgages at once when I refinance?

No, given the way the loan and title transfer works, you will not have to pay two mortgages at the one time. You will make your last monthly repayment on loan number one and then the following month you will start paying off loan number two.

If I don't like my new lender after I refinance, can I go back to my previous lender?

If you wish to return to your previous lender after refinancing, you will have to go through the refinancing process again and pay a second set of discharge and upfront fees. 

Therefore, before you refinance, it’s important to weigh up the new prospective lender against your current lender in a number of areas, including fees, flexibility, customer service and interest rate.