Falling home prices see better housing affordability across Australia

Falling home prices see better housing affordability across Australia

Housing affordability across the country is looking up, as property prices come down nationally due to COVID-19.

With interest rates falling across the board, servicing a mortgage has become slightly more affordable, the Real Estate Institute of Australia’s (REIA) Housing Affordability Report, released today, found.

Nationally, 34.5 per cent of a family’s income is required to meet mortgage repayments, down by 0.2 percentage points in the three months to June.

Housing affordability graph - June 2020 quarter

Source: REIA.

Adrian Kelly, REIA president, said declining variable interest rates have helped make mortgage repayments more affordable for families. 

“Even though the family income only increased 0.1 percentage point during the period, the average loan repayment decreased 0.6 percentage points through a drop in the average variable standard interest rate,” he said.

The Reserve Bank of Australia held the cash rate at a record low of 0.25 per cent yesterday, an indicator that lenders may continue to cut interest rates as competition in the industry flares up. 

Property prices in Australia decreased by 1.7 per cent in the three months to August 2020, the latest CoreLogic figures showed. Values have been falling for four consecutive months after COVID-19 began in Australia. 

The most unaffordable and affordable states and territories in Australia

Traditionally the most expensive state to purchase a home in, NSW residents saw housing unaffordability ease slightly in the June quarter.

Mortgage holders in NSW are devoting 42.3 per cent of their household income to making loan repayments. While this is down by 0.2 percentage points in the June quarter, it jumped by 2.4 percentage points compared with the same quarter in 2019. 

Despite housing affordability improving in NSW, the proportion of household income going to a mortgage is 7.8 percentage points higher than the national benchmark, making it the least affordable state or territory for homebuyers.

Victorians also found purchasing a home closer within reach, with 36.8 per cent of a family’s income required to service an average mortgage, declining by 0.7 percentage points in the June quarter, but 2 percentage points higher than the same time last year.

The most affordable state or territory to snap up a home in Australia is the Northern Territory, where buyers devote as low as a fifth of their household income to paying off the mortgage. This crept up slightly by 0.2 percentage points in the three months to June, but came down by nearly 3 percentage points from last year.

Where property buyers are most active

Notably, a quarter of all first home buyers in the country are from NSW, while a third are from Victoria. One in three buying a home to live in NSW are first home buyers, and the cohort accounts for some 42 per cent of Victoria’s owner-occupiers. 

First home buyers in NSW are taking out larger loans than before, with the average loan size to first-timers growing to about $515,000, up by 16 per cent in the 12 months to June 2020.

A similar trend is being seen in Victoria. The average loan to first home buyers surged by 12.8 per cent over the year to about $442,000.

NSW residents carry the biggest mortgages across the country on average, about 22 per cent higher than the average Australian home loan, while Victoria’s is 4.5 per cent higher than the national benchmark.

The average residential mortgage in NSW and Victoria is about $605,000 and $515,000 respectively, both ballooning by 17 per cent over the year to June 2020.

Expensive housing in NSW and Victoria failed to deter those looking to get their foot on the states’ property ladders. The number of mortgages to first home buyers in NSW jumped by 16 per cent over the year to 6,801, while in Victoria, it rose by 11 per cent to 9,119.

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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.

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.

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.

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.

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 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

How much can I borrow with a guaranteed home loan?

Some lenders will allow you to borrow 100 per cent of the value of the property with a guaranteed home loan. For that to happen, the lender would have to feel confident in your ability to pay off the mortgage and in the security provided by your guarantor.

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.

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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.

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).

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.