How COVID-19 could make it easier for you to buy a home

How COVID-19 could make it easier for you to buy a home

The coronavirus has rocked Australia’s economy significantly, but there are signs that first-home buyers could benefit. 

Australia recorded its biggest quarterly fall in economic activity this week, but this has not yet translated to a major property market crash, and is not expected to, according to AMP Capital chief economist Shane Oliver.

“It’s not our base case that this will come in the form of a property crash (and that would be a bad outcome for the economy anyway via negative wealth effects), but it could come in the form of much softer property price gains over time after the initial hit into next year,” he said.

The housing market is losing steam, with prices across the nation creeping down by 1.7 per cent in the three months to August, the latest CoreLogic figures showed. 

Melbourne’s property market suffered in particular, as the ongoing lockdowns impact the market. Melbourne housing values fell by 4.6 per cent during the COVID-19 period, while capital city markets declined by 2.5 per cent.

JobKeeper and the mortgage repayment holidays, which will taper or end for many this month, are helping the housing market dodge bigger price drops. But Mr Oliver said it was likely for prices to plunge further, due to high unemployment, a weak rental market and the immigration downturn.

He expects average capital city prices to fall by between 10 and 15 per cent from the market’s April high until mid-2021. Melbourne is tipped to be most at risk, and housing values there are likely dive by 15 to 20 per cent.

Working from home

With many people transitioning to working from home long-term, this could potentially have a flow-on effect on housing prices.

If a mix of working in the office and from home becomes the new normal, as widely predicted, this could see a major shift in the types of properties in demand from home buyers.

While pre-pandemic, the trend towards apartments in metropolitan areas was clear, but COVID-19 and working from home could ramp up demand for spacious properties such as houses away from the city.

“(This) will mean less demand for property close to the CBD, greater demand for property in suburbs, with a decent community and environment and increased property demand in regional centres,” Mr Oliver said.

He added that it was possible that some office and retail properties affected by the pandemic could be converted to residential properties, which may help boost development and housing supply

“By fostering decentralisation, a shift away from cities to regional communities could dramatically improve housing affordability over time,” he said.

Unemployment

While there’s the possibility that the property market could bounce back after the pandemic is controlled, some fundamental shifts in certain industries – including travel and tourism as well as an upward trend in e-commerce – could point towards “a long tail of unemployment”, according to Mr Oliver.

“Officially measured unemployment is still likely to hit 10 per cent by year end and will probably have only fallen to around 9 per cent by end (of) 2021,” he said.

“This will likely result in more forced property sales and act as a drag on home prices, as income support measures and the bank payment holiday wind down.”

Reserve Bank of Australia (RBA) analysis has indicated that for every 1 percentage point increase in the unemployment rate, the mortgage arrears rate generally climbs by about 0.8 percentage points, according to the central bank’s April 2020 Financial Stability Review

Immigration

One of the biggest drivers of the rise in housing values has been overseas immigration, but travel bans have delivered a severe beating to net immigration numbers. It is anticipated that low permanent migration could have a strong impact on demand for residential property. 

“This could result in a significant oversupply of dwellings, and in turn could reverse the years of undersupply that has maintained very high house prices since mid-last decade,” Mr Oliver said.

“Of course, if this is just for a year, it wouldn’t have much lasting impact. And the return of expat Australians may provide a short-term offset.”

Mr Oliver noted that even when it becomes safe to push immigration back up, it could be difficult for this to recover given high unemployment and relatively few work opportunities.

“This points to a long period of constrained housing demand and hence more constrained house prices,” he said.

Low interest rates

The RBA held the official cash rate at 0.25 per cent this week, nearly half a year since the central bank cut the rate to a record low in March due to the pandemic. 

The coronavirus cash rate reduction has had an impact on interest rates offered by mortgage lenders on the market, meaning it could be cheaper for some buyers to borrow money to purchase a home now.

The average interest rate on the RateCity database for those living in their own home fell to 3.26 per cent in September from 3.71 per cent pre-coronavirus in February, representing a fall of 46 basis points.

If someone took out a 30-year, $400,000 loan this month on the average interest rate of 3.26 per cent, they could potentially be paying $100 less per month than someone who took out an average-rate loan in February, equivalent to about $1,200 a year in savings, according to RateCity’s analysis.

Average owner-occupier interest rates.JPG

Source: RateCity

The decline in home loan rates across the board have prompted nine lenders to bring their rates below 2 per cent, with the lowest at 1.90 per cent (comparison rate 2.39 per cent), coming from Reduce Home Loans.

Some of the lowest mortgage rates on RateCity

Some of the lowest mortgage rates on RateCity

Lender Product Intro rate (%) Intro term Revert/ongoing rate (%) Comparison rate (%)
Reduce Home Loans Rate Crusher 1 Year Intro (Principal and Interest) 1.9 12 months 2.39 2.39
Easy Street Financial Services Standard Variable Home Loan (New Money Offer) (Principal and Interest) ($750k-$2.5m)     1.95 1.99
Homestar Finance Star Classic Owner Occupied 1 Year Fixed Special     1.98 2.41
loans.com.au Smart Booster Home Loan Discounted Variable - 1yr 1.99 12 months 2.48 2.47
People's Choice Credit Union Package Fixed Home Loan (Principal and Interest) (First Home Buyer) 1 Year     1.99 3.91

Source: RateCity

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Learn more about home loans

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 happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

What is a variable home loan?

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

What is a comparison rate?

The comparison rate is a more inclusive way of comparing home loans that factors in not only on the interest rate but also the majority of upfront and ongoing charges that add to the total cost of a home loan.

The rate is calculated using an industry-wide formula based on a $150,000 loan over a 25-year period and includes things like revert rates after an introductory or fixed rate period, application fees and monthly account keeping fees.

In Australia, all lenders are required by law to publish the comparison rate alongside their advertised rate so people can compare products easily.

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 is a low-deposit home loan?

A low-deposit home loan is a mortgage where you need to borrow more than 80 per cent of the purchase price – in other words, your deposit is less than 20 per cent of the purchase price.

For example, if you want to buy a $500,000 property, you’ll need a low-deposit home loan if your deposit is less than $100,000 and therefore you need to borrow more than $400,000.

As a general rule, you’ll need to pay LMI (lender’s mortgage insurance) if you take out a low-deposit home loan. You can use this LMI calculator to estimate your LMI payment.

How much deposit will I need to buy a house?

A deposit of 20 per cent or more is ideal as it’s typically the amount a lender sees as ‘safe’. Being a safe borrower is a good position to be in as you’ll have a range of lenders to pick from, with some likely to offer up a lower interest rate as a reward. Additionally, a deposit of over 20 per cent usually eliminates the need for lender’s mortgage insurance (LMI) which can add thousands to the cost of buying your home.

While you can get a loan with as little as 5 per cent deposit, it’s definitely not the most advisable way to enter the home loan market. Banks view people with low deposits as ‘high risk’ and often charge higher interest rates as a precaution. The smaller your deposit, the more you’ll also have to pay in LMI as it works on a sliding scale dependent on your deposit size.

Interest Rate

Your current home loan interest rate. To accurately calculate how much you could save, an accurate interest figure is required. If you are not certain, check your bank statement or log into your mortgage account.

Do mortgage brokers need a consumer credit license?

In Australia, mortgage brokers are defined by law as being credit service or assistance providers, meaning that they help borrowers connect with lenders. Mortgage brokers may not always need a consumer credit license however if they’re operating solo they will need an Australian Credit License (ACL). Further, they may also need to comply with requirements asking them to mention their license number in full.

Some mortgage brokers can be “credit representatives”, or franchisees of a mortgage aggregator. In this case, if the aggregator has a license, the mortgage broker need not have one. The reasoning for this is that the franchise agreement usually requires mortgage brokers to comply with the laws applicable to the aggregator. If you’re speaking to a mortgage broker, you can ask them if they receive commissions from lenders, which is a good indicator that they need to be licensed. Consider requesting their license details if they don’t give you the details beforehand. 

You should remember that such a license protects you if you’re given incorrect or misleading advice that results in a home loan application rejection or any financial loss. Brokers are regulated by the Australian Securities & Investment Commission (ASIC), as per the National Consumer Credit Protection (NCCP) Act. 

What are the responsibilities of a mortgage broker?

Mortgage brokers act as the go-between for borrowers looking for a home loan and the lenders offering the loan. They offer personalised advice to help borrowers choose the right home loan for their needs.

In Australia, mortgage brokers are required by law to carry an Australian Credit License (ACL) if they offer credit assistance services. Which is the legal term for guidance regarding the different kinds of credit offered by lenders, including home loan mortgages. They may not need this license if they are working for an aggregator, for instance, as a franchisee. In both these situations, they need to comply with the regulations laid down by the Australian Securities and Investments Commission (ASIC).

These regulations, which are stipulated by Australian legislation, require mortgage brokers to comply with what are called “responsible lending” and “best interest” obligations. Responsible lending obligations mean brokers have to suggest “suitable” home loans. This means loans that you can easily qualify for,  actually meet your needs, and don’t prove unnecessarily challenging for you.

Starting 1 January 2021, mortgage brokers must comply with best interest obligations in addition to responsible lending obligations. These require mortgage brokers to act in the best interest of their customers and also requires them to prioritise their customers’ interests over their own. For instance, a mortgage broker may not recommend a lender who gives them a commission if that lender’s home loan offer does not benefit that particular customer.

How to break up with your mortgage broker

If you find a mortgage broker giving you generic advice or trying to sell you a competitive offer from an unsuitable lender, you might be better off  breaking up with the mortgage broker and consulting someone else. Breaking up with a mortgage broker can be done over the phone, or via email. You can also raise a complaint, either with the broker’s aggregator or with the Australian Financial Complaints Authority as necessary.

As licensed industry professionals, mortgage brokers have the responsibility of giving you accurate advice so that you know what to expect when you apply for a home loan. You may have approached the mortgage broker, for instance, because you have questions about the terms of a home loan a lender offered you. 

You should remember that mortgage brokers are obliged by law to act in your best interests and as part of complying with The Australian Securities and Investments Commission’s (ASIC) regulations. If you feel you didn’t get the right advice from the mortgage broker, or that you lost money as a result of accepting the broker’s suggestions regarding a lender or home loan offer, you can file a complaint with the ASIC and seek compensation. 

When you first speak to a mortgage broker, consider asking them about their Lender Panel, which is the list of lenders they usually recommend and who may pay them a commission. This information can help you decide if the advice they give you has anything to do with the remuneration they may receive from one or more lenders.

How do I take out a low-deposit home loan?

If you want to take out a low-deposit home loan, it might be a good idea to consult a mortgage broker who can give you professional financial advice and organise the mortgage for you.

Another way to take out a low-deposit home loan is to do your own research with a comparison website like RateCity. Once you’ve identified your preferred mortgage, you can apply through RateCity or go direct to the lender.

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 personalised is my rating?

Real Time Ratings produces instant scores for loan products and updates them based what you tell us about what you’re looking for in a loan. In that sense, we believe the ratings are as close as you get to personalised; the more you tell us, the more we customise to ratings to your needs. Some borrowers value flexibility, while others want the lowest cost loan. Your preferences will be reflected in the rating. 

We also take a shorter term, more realistic view of how long borrowers hold onto their loan, which gives you a better idea about the true borrowing costs. We take your loan details and calculate how much each of the relevent loans would cost you on average each month over the next five years. We assess the overall flexibility of each loan and give you an easy indication of which ones are likely to adjust to your needs over time.