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.

Savings over

Select a number of years to see how much money you can save with different home loans over time.

e.g. To see how much you could save in two years by switching mortgages,  set the slider to 2.

How can I get ANZ home loan pre-approval?

Shopping for a new home is an exciting experience and getting a pre-approval on the loan may give you the peace of mind that you are looking at properties within your budget. 

At the time of applying for the ANZ Bank home loan pre-approval, you will be required to provide proof of employment and income, along with records of your savings and debts.

An ANZ home loan pre-approval time frame is usually up to three months. However, being pre-approved doesn’t necessarily mean you will get your home loan. Other factors could lead to your home loan application being rejected, even with a prior pre-approval. Some factors include the property evaluation not meeting the bank’s criteria or a change in your financial circumstances.

You can make an application for ANZ home loan pre-approval online or call on 1800100641 Mon-Fri 8.00 am to 8.00 pm (AEST).

Monthly Repayment

Your current monthly home loan repayment. To accurately calculate how much you could save, an accurate payment figure is required. If you are not certain, check your bank statement.

How much deposit do I need for a home loan from ANZ?

Like other mortgage lenders, ANZ often prefers a home loan deposit of 20 per cent or more of the property value when you’re applying for a home loan. It may be possible to get a home loan with a smaller deposit of 10 per cent or even 5 per cent, but there are a few reasons to consider saving a larger deposit if possible:

  • A larger deposit tells a lender that you’re a great saver, which could help increase the chances of your home loan application getting approved.
  • The more money you pay as a deposit, the less you’ll have to borrow in your home loan. This could mean paying off your loan sooner, and being charged less total interest.
  • If your deposit is less than 20 per cent of the property value, you might incur additional costs, such as Lenders Mortgage Insurance (LMI).

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.

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 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.

How much deposit do I need for a home loan from NAB?

The right deposit size to get a home loan with an Australian lender will depend on the lender’s eligibility criteria and the value of your property.

Generally, lenders look favourably on applicants who save up a 20 per cent deposit for their property This also means applicants do not have to pay Lenders Mortgage Insurance (LMI). However, you may still be able to obtain a mortgage with a 10 - 15 per cent deposit.  

Keep in mind that NAB is one of the participating lenders for the First Home Loan Deposit Scheme, which allows eligible borrowers to buy a property with as low as a 5 per cent deposit without paying the LMI. The Federal Government guarantees up to 15 per cent of the deposit to help first-timers to become homeowners.

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.

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

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.

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.