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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

LenderProductIntro rate (%)Intro termRevert/ongoing rate (%)Comparison rate (%)
Reduce Home LoansRate Crusher 1 Year Intro (Principal and Interest)1.912 months2.392.39
Easy Street Financial ServicesStandard Variable Home Loan (New Money Offer) (Principal and Interest) ($750k-$2.5m)1.951.99
Homestar FinanceStar Classic Owner Occupied 1 Year Fixed Special1.982.41
loans.com.auSmart Booster Home Loan Discounted Variable - 1yr1.9912 months2.482.47
People's Choice Credit UnionPackage Fixed Home Loan (Principal and Interest) (First Home Buyer) 1 Year1.993.91

Source: RateCity

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This article was reviewed by Senior Journalist Tony Ibrahim before it was published as part of RateCity's Fact Check process.

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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.

When do mortgage payments start after settlement?

Generally speaking, your first mortgage payment falls due one month after the settlement date. However, this may vary based on your mortgage terms. You can check the exact date by contacting your lender.

Usually your settlement agent will meet the seller’s representatives to exchange documents at an agreed place and time. The balance purchase price is paid to the seller. The lender will register a mortgage against your title and give you the funds to purchase the new home.

Once the settlement process is complete, the lender allows you to draw down the loan. The loan amount is debited from your loan account. As soon as the settlement paperwork is sorted, you can collect the keys to your new home and work your way through the moving-in checklist.

What are the features of home loans for expats from Westpac?

If you’re an Australian citizen living and working abroad, you can borrow to buy a property in Australia. With a Westpac non-resident home loan, you can borrow up to 80 per cent of the property value to purchase a property whilst living overseas. The minimum loan amount for these loans is $25,000, with a maximum loan term of 30 years.

The interest rates and other fees for Westpac non-resident home loans are the same as regular home loans offered to borrowers living in Australia. You’ll have to submit proof of income, six-month bank statements, an employment letter, and your last two payslips. You may also be required to submit a copy of your passport and visa that shows you’re allowed to live and work abroad.

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).

Does the Home Loan Rate Promise apply to discounted interest rate offers, such as honeymoon rates?

No. Temporary discounts to home loan interest rates will expire after a limited time, so they aren’t valid for comparing home loans as part of the Home Loan Rate Promise.

However, if your home loan has been discounted from the lender’s standard rate on a permanent basis, you can check if we can find an even lower rate that could apply to you.

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 are the different types of home loan interest rates?

A home loan interest rate is used to calculate how much you’ll pay the lender, usually annually, above the amount you borrow. It’s what the lenders charge you for them lending you money and will impact the total amount you’ll pay over the life of your home loan. 

Having understood what are home loan rates in general, here are the two types you usually have with a home loan:

Fixed rates

These interest rates remain constant for a specific period and are a good option if you’re a first-time buyer or if you’re looking for a fixed monthly repayment. One possible downside of a fixed rate is that it may be higher than a variable rate. Also, you don’t benefit from any lowering of interest rates in the market. On the flip side, if rates go up, your rate won’t change, possibly saving you money.

Variable rates

With variable interest rates, the lender can change them at any time. This change can be based on economic conditions or other reasons. Changes in interest rates could be beneficial if your monthly repayment decreases but can be a problem if it increases. Variable interest rates offer several other benefits often not available with fixed rate home loans like redraw and offset facilities and free extra repayments. 

What is the Home Loan Rate Promise?

The Home Loan Rate Promise is RateCity putting its money where its mouth is. We believe that too many Australians are paying too much for their home loans. We’re so confident we can help Aussies save money, if we can’t beat your current rate, we’ll give you a $100 gift card.*

There are two reasons it pays to check your rate with the Home Loan Rate Promise:

  • You can find out how much you could save on your home loan by switching to a loan with a lower interest rate
  • If we can’t beat your current rate, you can claim a $100 gift card with our Home Loan Rate Promise*

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.

How do you determine which home loan rates/products I’m shown?

When you check your home loan rate, you’ll supply some basic information about your current loan, including the amount owing on your mortgage and your current interest rate.

We’ll compare this information to the home loan options in the RateCity database and show you which home loan products you may be eligible to apply for.

 

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.

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.

Cash or mortgage – which is more suitable to buy an investment property?

Deciding whether to buy an investment property with cash or a mortgage is a matter or personal choice and will often depend on your financial situation. Using cash may seem logical if you have the money in reserve and it can allow you to later use the equity in your home. However, there may be other factors to think about, such as whether there are other debts to pay down and whether it will tie up all of your spare cash. Again, it’s a personal choice and may be worth seeking personal advice.

A mortgage is a popular option for people who don’t have enough cash in the bank to pay for an investment property. Sometimes when you take out a mortgage you can offset your loan interest against the rental income you may earn. The rental income can also help to pay down the loan.

Why does Westpac charge an early termination fee for home loans?

The Westpac home loan early termination fee or break cost is applicable if you have a fixed rate home loan and repay part of or the whole outstanding amount before the fixed period ends. If you’re switching between products before the fixed period ends, you’ll pay a switching break cost and an administrative fee. 

The Westpac home loan early termination fee may not apply if you repay an amount below the prepayment threshold. The prepayment threshold is the amount Westpac allows you to repay during the fixed period outside your regular repayments.

Westpac charges this fee because when you take out a home loan, the bank borrows the funds with wholesale rates available to banks and lenders. Westpac will then work out your interest rate based on you making regular repayments for a fixed period. If you repay before this period ends, the lender may incur a loss if there is any change in the wholesale rate of interest.