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Government stimulus and low interest rates prop up declining property market

Government stimulus and low interest rates prop up declining property market

Property prices have tumbled nationally due to COVID-19, but government stimulus, mortgage deferral schemes and rock bottom interest rates have helped cushion the falls.

Across the combined capitals, house prices have dropped by 2 per cent and unit prices by 2.2 per cent in the three months to June 2020, according to Domain Group data.

On an annual basis, property values were still in positive territory, with houses and units up by 6.6 per cent and 4.5 per cent respectively in the 12 months to June 2020.

Domain senior research analyst, Nicola Powell, said it was the first quarter where COVID-19 impacts were beginning to show, with values rolling back to where they were before the price recovery.

“While most capital cities declined, the falls have been minimal to-date as unprecedented government stimulus, mortgage holidays, low stock levels and record low interest rates shield values from any significant declines, helping to retain stability in the housing market,” Dr Powell said.

She added that stimulus measures and bank support through mortgage deferrals has kept the number of distressed sales low, which may in turn prop up property prices.

Yet the economy’s performance after government support, such as JobKeeper, ends would largely determine the national outlook for prices.

“The risk to prices becomes greater once the stimulus measures cease and we face the fiscal cliff,” Dr Powell said.

How have property prices moved during COVID-19?

Canberra property prices showed the greatest resilience, with houses shooting up by 4.1 per cent in the June quarter despite COVID-19. The national capital’s units fell by 1.3 per cent, the smallest decline for units in the country.

In Sydney, house prices came down by 2 per cent, or $23,000, in the June quarter, while unit prices declined by 1.9 per cent, or $14,000.

Real estate values in the harbour city were picking up pre-pandemic, with houses and units growing by 10.5 per cent and 7.3 per cent respectively. 

“House prices are $110,000 above the early 2019 trough but remain $55,000 below the mid-2017 peak. Unit prices are $50,000 above the mid-2019 trough but remain $52,000 below the mid-2017 peak.” 

Sydney is still the only capital city with median house prices in the million-dollar club.

Melbourne suffered the most among the country’s house market, with prices plunging by 3.5 per cent, or $32,000, in the three months to June. Unit values have held up better than houses, dropping by 1.7 per cent, or about $9,000.

“Prior to this, Melbourne house prices had made a full recovery from the 2017-19 slump. This quarter marks the first fall since early 2019 and is the deepest quarterly fall of all the major capital cities,” Dr Powell said.

She noted that the second lockdown the city is undergoing may stall buyer momentum temporarily.

House and unit prices in the June 2020 quarter

Change in value – Q1 vs Q2Change in value – year-on-yearHouse median priceUnit median price
Sydney

Houses: -2.0%

Units: -1.9%

Houses: 10.5%

Units: 7.3%

$1,143,012$735,417
Melbourne

Houses: -3.5%

Units: -1.7%

Houses: 6.9%

Units: 6.5%

$881,369$537,345
Brisbane

Houses: -1.4%

Units: -4.1%

Houses: 2.4%

Units: -8.2%

$582,847$375,285
Adelaide

Houses: 0.2%

Units: -2.9%

Houses: 3.0%

Units: -2.1%

$553,036$319,266
Perth

Houses: -1.5%

Units: -4.9%

Houses: -1.4%

Units: -0.1%

$522,414$334,284
Hobart

Houses: 1.4%

Units: -1.5%

Houses: 10.0%

Units: 17.3%

$529,388$429,464
Canberra

Houses: 4.1%

Units: -1.3%

Houses: 9.3%

Units: -2.0%

$819,090$453,750
Darwin

Houses: -1.0%

Units: -3.7%

Houses: -0.1%

Units: -20.8%

$516,213$241,461
Combined capitals

Houses: -2.0%

Units: -2.2%

Houses: 6.6%

Units: 4.5%

$804,602$560,838

Source: Domain Group.

Is it a good time to buy a property?

While property prices may be falling, home loan rates are at their lowest the market has seen.

The lowest fixed mortgage rate on the RateCity database is 1.99 per cent, from Bank of Us. But this rate is only available to Tasmanian residents. The lender was the first in the market to bring a mortgage rate of less than 2 per cent to the market.

It is also possible to secure a variable rate below 2 per cent, with Loans.com.au offering a 1.99 per cent introductory rate. However, this rate only lasts for 12 months, and the rate will revert to 2.57 per cent after this period end. 

For some, it could be a good time to buy a property if you have a secure income and have a substantial deposit saved up.

Others who may be worried about the ongoing impacts of COVID-19 may want to wait and see before diving into the property market and committing to a 30-year home loan. Some may also want to keep their cash close for emergency purposes as uncertainty grows.

Your best course of action may depend on your financial situation and priorities. It’s best to seek professional financial advice before committing to a home loan.

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This article was reviewed by Personal Finance Editor Alex Ritchie before it was published as part of RateCity's Fact Check process.

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Learn more about home loans

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.

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.

When does Commonwealth Bank charge an early exit fee?

When you take out a fixed interest home loan with the Commonwealth Bank, you’re able to lock the interest for a particular period. If the rates change during this period, your repayments remain unchanged. If you break the loan during the fixed interest period, you’ll have to pay the Commonwealth Bank home loan early exit fee and an administrative fee.

The Early Repayment Adjustment (ERA) and Administrative fees are applicable in the following instances:

  • If you switch your loan from fixed interest to variable rate
  • When you apply for a top-up home loan
  • If you repay over and above the annual threshold limit, which is $10,000 per year during the fixed interest period
  • When you prepay the entire outstanding loan balance before the end of the fixed interest duration.

The fee calculation depends on the interest rates, the amount you’ve repaid and the loan size. You can contact the lender to understand more about what you may have to pay. 

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 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 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).

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.

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.

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.

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 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

What is a loan-to-value ratio (LVR)?

A loan-to-value ratio (otherwise known as a Loan to Valuation Ratio or LVR), is a calculation lenders make to work out the value of your loan versus the value of your property, expressed as a percentage.   Lenders use this calculation to help assess your suitability for a home loan, and whether you need to pay lender’s mortgage insurance (LMI). As a general rule, most banks will require you to pay LMI if your loan-to-value ratio is 80 per cent or more.   LVR is worked out by dividing the loan amount by the value of the property. If you are looking for a quick ball-park estimate of LVR, the size of your deposit is a good indicator as it is directly proportionate to your LVR. For instance, a loan with an LVR of 80 per cent requires a deposit of 20 per cent, while a 90 per cent LVR requires 10 per cent down payment. 

LOAN AMOUNT / PROPERTY VALUE = LVR%

While this all sounds simple enough, it is worth doing a more accurate calculation of LVR before you commit to buying a place as there are some traps to be aware of. Firstly, the ‘loan amount’ is the price you paid for the property plus additional costs such as stamp duty and legal fees, minus your deposit amount. Secondly, the ‘property value’ is determined by your lender’s valuation of the property, not the price you paid for it, and sometimes these can differ so where possible, try and get your bank to evaluate the property before you put in an offer.