CoreLogic tracks slowing housing affordability

CoreLogic tracks slowing housing affordability

CoreLogic has crunched the numbers to confirm what many of us suspected – Australia’s housing affordability worsened over the first quarter of 2017, with several measuring metrics showing a marked deterioration over the past few years.

To track housing affordability in Australia, CoreLogic uses four different measuring metrics, which use median household incomes modelled by the Australian National University (ANU):

Dwelling price to household income ratio 

According to CoreLogic, it would take 7.3 years of gross annual income to purchase a property outright as of March 2017. This national price to income ratio was recorded at 7.2 a year earlier, 6.4 five years earlier and 6.1 a decade ago, indicating that house prices are generally becoming less affordable over time. 

Years to save a deposit

CoreLogic found that at the end of the March 2017 quarter, it would take 1.5 years of gross annual household income to save a 20% deposit on a national basis. A year earlier, it would have taken 1.4 years; five years ago, 1.3 years; and a decade ago, 1.2 years.

Serviceability

Mortgage serviceability is essentially a measure of a borrower’s ability to repay a loan. CoreLogic measures average serviceability by calculating mortgage repayments on an 80% loan to value ratio (LVR) mortgage utilising the standard variable mortgage rate and a 25-year mortgage, and determining what percentage of gross annual household income would be required to pay that mortgage.

According to CoreLogic:  

  • At the end of March 2017, the discounted variable mortgage rate for owner occupiers was 4.55% and a mortgage required 38.9% of a household’s income.
  • A year earlier, mortgage rates were 4.85% and the mortgage used 39.6% of the household income.
  • Five years ago, mortgage rates were 6.7% and households required 42.2% of their income for their mortgage repayments.
  • A decade ago, mortgage rates were 7.45% and it took 42.8% of a household’s income to service a mortgage.
  • The proportion of household income required to service a mortgage previously peaked at 51% in June 2008, when mortgage rates were 8.85%. 

Dwelling rent to household income ratio

CoreLogic’s last housing affordability metric measures the proportion of gross annual household income required to pay rent, rather than taking out a mortgage.  In March 2017, this ratio was recorded at 29.6% compared to 30.4% a year earlier, 29.1% five years earlier and 25.8% a decade ago.

Region Price to income ratio Yrs of household income reqired for a 20% deposit on a dwelling % of household income required to service an 80% LVR mortgage % of household income required to rent a home
Sydney

8.4

1.7 45% 28.2%
Melbourne 7.3 1.5 39.4% 25.9%
Brisbane 5.9 1.2 31.8% 26%
Adelaide 6.4 1.3 34.5% 26.7%
Perth 6 1.2 32% 22.8%
Hobart 5.8 1.2 31.1% 29%
Darwin 4.4 0.9 23.7% 21.8%
Canberra 5.4 1.1 29.2% 22.9%
Regional NSW 6.7 1.3 36.1% 30%
Regional VIC 5.6 1.1 30.1% 26.7%
Regional SA 5 1 26.8% 25%
Regional WA 5.5 1.1 29.3% 27.6%
Regional TAS 5.1 1 27.3% 27.6%
Regional NT 5.1 1 27.2% 29.1%
Combined capital cities 6.9 1.4 37.2% 25.9%
Combined regional areas 6.4 1.3 34.4% 29.4%

Source: CoreLogic

According to CoreLogic head of research, Cameron Kusher, Sydney and Melbourne appear to be experiencing the worst housing affordability deterioration, with affordability on a price to income and saving for a deposit basis both declining in these cities in recent years. However, these metrics have remained relatively unchanged or even slightly improved in most of Australia’s other capital cities.

“Another important point to note is that lower mortgage rates make servicing debt easier however, it doesn’t make it easier to overcome the deposit hurdle, particularly given fairly sluggish household income growth over recent years.” 

“The data also suggests that servicing a mortgage remains more expensive than paying for rental accommodation although the gap has narrowed as interest rates have fallen.”

“On the other hand, as mortgage rates have fallen servicing a mortgage has required a lower proportion of household income which in turn has allowed some owners to reinvest or increase their spending elsewhere.”

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Learn more about home loans

How long should I have my mortgage for?

The standard length of a mortgage is between 25-30 years however they can be as long as 40 years and as few as one. There is a benefit to having a shorter mortgage as the faster you pay off the amount you owe, the less you’ll pay your bank in interest.

Of course, shorter mortgages will require higher monthly payments so plug the numbers into a mortgage calculator to find out how many years you can potentially shave off your budget.

For example monthly repayments on a $500,000 over 25 years with an interest rate of 5% are $2923. On the same loan with the same interest rate over 30 years repayments would be $2684 a month. At first blush, the 30 year mortgage sounds great with significantly lower monthly repayments but remember, stretching your loan out by an extra five years will see you hand over $89,396 in interest repayments to your bank.

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.

Which mortgage is the best for me?

The best mortgage to suit your needs will vary depending on your individual circumstances. If you want to be mortgage free as soon as possible, consider taking out a mortgage with a shorter term, such as 25 years as opposed to 30 years, and make the highest possible mortgage repayments. You might also want to consider a loan with an offset facility to help reduce costs. Investors, on the other hand, might have different objectives so the choice of loan will differ.

Whether you decide on a fixed or variable interest rate will depend on your own preference for stability in repayment amounts, and flexibility when it comes to features.

If you do not have a deposit or will not be in a financial position to make large repayments right away you may wish to consider asking a parent to be a guarantor or looking at interest only loans. Again, which one of these options suits you best is reliant on many factors and you should seek professional advice if you are unsure which mortgage will suit you best.

What percentage of income should my mortgage repayments be?

As a general rule, mortgage repayments should be less than 30 per cent of your pre-tax income to avoid falling into mortgage stress. When mortgage repayments exceed this amount it becomes hard to budget for other living expenses and your lifestyle quality may be diminished.

What happens to your mortgage when you die?

There is no hard and fast answer to what will happen to your mortgage when you die as it is largely dependent on what you have set out in your mortgage agreement, your will (if you have one), other assets you may have and if you have insurance. If you have co-signed the mortgage with another person that person will become responsible for the remaining debt when you die.

If the mortgage is in your name only the house will be sold by the bank to cover the remaining debt and your nominated air will receive the remaining sum if there is a difference. If there is a turn in the market and the sale of your house won’t cover the remaining debt the case may go to court and the difference may have to be covered by the sale of other assets.  

If you have a life insurance policy your family may be able to use some of the lump sum payment from this to pay down the remaining mortgage debt. Alternatively, your lender may provide some form of mortgage protection that could assist your family in making repayments following your passing.

How do I calculate monthly mortgage repayments?

Work out your mortgage repayments using a home loan calculator that takes into account your deposit size, property value and interest rate. This is divided by the loan term you choose (for example, there are 360 months in a 30-year mortgage) to determine the monthly repayments over this time frame.

Over the course of your loan, your monthly repayment amount will be affected by changes to your interest rate, plus any circumstances where you opt to pay interest-only for a period of time, instead of principal and interest.

How do I save for a mortgage when renting?

Saving for a deposit to secure a mortgage when renting is challenging but it can be done with time and patience. If you’re on a single income it can be even more difficult but this shouldn’t discourage you from buying your own home.

To save for a deposit, plan out a monthly budget and put it in a prominent position so it acts as a daily reminder of your ultimate goal. In your budget, set aside an amount of money each week to go into a savings account so you can start building up the ‘0’s’ in your account.  There are a range of online savings accounts that offer reasonable interest, although some will only off you high rates for the first few months so be wary of this.

If you aren’t able to save a large deposit, you can consider ways of entering the market that require small or no deposits. This can include getting a parent to act as guarantor for your home loan or entering the market with an interest only loan.

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 much are repayments on a $250K mortgage?

The exact repayment amount for a $250,000 mortgage will be determined by several factors including your deposit size, interest rate and the type of loan. It is best to use a mortgage calculator to determine your actual repayment size.

For example, the monthly repayments on a $250,000 loan with a 5 per cent interest rate over 30 years will be $1342. For a loan of $300,000 on the same rate and loan term, the monthly repayments will be $1610 and for a $500,000 loan, the monthly repayments will be $2684.

How much money can I borrow for a home loan?

Tip: You can use RateCity how much can I borrow calculator to get a quick answer.

How much money you can borrow for a home loan will depend on a number of factors including your employment status, your income (and your partner’s income if you are taking out a joint loan), the size of your deposit, your living expenses and any other debt you might hold, including credit cards. 

A good place to start is to work out how much you can afford to make in monthly repayments, factoring in a buffer of at least 2 – 3 per cent to allow for interest rate rises along the way. You’ll also need to factor in additional costs that come with purchasing a property such as stamp duty, legal fees, building inspections, strata or council fees.

If you are planning on renting the property, you can factor in the expected rental income to help offset the mortgage, but again it’s prudent to add a significant buffer to allow for rental management fees, maintenance costs and short periods of no rental income when tenants move out. It’s also wise to factor in changes in personal circumstances – the typical home loan lasts for around 30 years and a lot can happen between now and then.

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.

What happens when you default on your mortgage?

A mortgage default occurs when you are 90 days or more behind on your mortgage repayments. Late repayments will often incur a late fee on top of the amount owed which will continue to gather interest along with the remaining principal amount.

If you do default on a mortgage repayment you should try and catch up in next month’s payment. If this isn’t possible, and missing payments is going to become a regular issue, you need to contact your lender as soon as possible to organise an alternative payment schedule and discuss further options.

You may also want to talk to a financial counsellor. 

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

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