Home loan pre-approvals surge to new heights

Home loan pre-approvals surge to new heights

Falling property prices haven’t been enough to shake confidence in the market as mortgage pre-approvals skyrocket to an all time high, according to the largest mortgage broker in Australia.

Home loan pre-approvals jumped by 71 per cent from January to August this year, Aussie Home Loans said, at a time when major property markets are shrinking around the country.

August application numbers reached an all time high -- and it did so by doubling the previous record set in 2018, James Symond said, chief executive of Aussie Home Loans. 

"The pent-up demand potentially influenced by lockdowns, lower supply levels, and the savings from the lack of travel and social spending means a portion of the market are ready to act on their property dreams," he said.

“There’s a strong indication that people are giving themselves as much certainty as they can in an uncertain environment – and property seems to be where Australians seek that certainty to ‘bank on’ their future.”

The strong pre-approval numbers could be a sign of life returning to normal, Mr Symond said, as the Spring property season tends to outperform others.

“There’s a good chance that this year will not be any different given the record number of pre-approvals ahead of the spring property season,” he said.

Behind the surge

First home buyers bolstered the surge as they accounted for 53 per cent of all pre-approval applications, Aussie Homes Loans said.

This rise represented a significant increase. Compared to the same period a year earlier, first time buyer applications jumped by 130 per cent.

The rise in first home buyers could correlate with the availability of a government scheme designed to help them enter the market, Mr Symond told RateCity.

"We are receiving record levels of enquiries from first home buyers to help them access the various government initiatives," he said.

"The high level of demand has surprised us during these difficult economic times, but unfortunately the majority of first home buyers are often confused about the eligibility requirements.

"Preparing the schemes’ application and the home loan process can be complex, especially as they come with strict eligibility requirements and conditions, which many first home buyers simply cannot navigate on their own."

The federal government’s first home loan deposit scheme allows newcomers looking to buy a property to secure a mortgage with a deposit of 5 per cent -- and it let’s them do this without having to spend thousands of dollars on lenders mortgage insurance, a requisite for home loans with deposits less than 20 per cent.

Each financial year, about 10,000 places are made available to first home buyers. Applications for this year’s intake opened in July.

Data from the Australian Bureau of Statistics (ABS) also suggests there’s been a rise in first time buyers. 

The statistical body said a strong cohort of first time buyers contributed to the $19 billion in home loan commitments in July -- representing a 9 per cent lift from the previous month to achieve the largest increase in its data series.

A rise in pre-approvals as property values shrink in some cities

Home loan approvals generally went up in the states that have contained the coronavirus pandemic, Aussie Home Loans said. 

“More Australians are coming to terms with the new normal as it impacts their day to day,” Mr Symond said.

“With interest rates at an all-time low and remaining low, there are people out there seeking the right opportunity.”

New South Wales received the highest number of applications, followed by Victoria, Queensland, and South Australia. 

Victoria had a strong presentation of pre-approvals, but the number declined sharply after entering a second lockdown.

Property markets around the country have been going through a period of volatility. Australian property prices fell for three months in a row until July, according to CoreLogic. 

Property value in Melbourne dropped by 1.2 per cent and Sydney dropped by 0.9 per cent in July, according to CoreLogic’s Home Value Index report, with other capital cities experiencing smaller contractions. 

And property prices are expected to fall a little further, before recovering, according to projections from Westpac. 

House and unit prices are expected to fall by 5 per cent next year, the bank’s economists forecast, before overcoming a bumpy recovery to rebound.

“We now expect many capital city markets to be more resilient with a national fall of 5 per cent between April and June next year,” chief economist Bill Evans and senior economist Matthew Hassan said.

“Of most importance is that we are much more optimistic about the pace of price appreciation over the following two years with a total expected increase of around 15 per cent.”

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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.

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 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.

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.

Are bad credit home loans dangerous?

Bad credit home loans can be dangerous if the borrower signs up for a loan they’ll struggle to repay. This might occur if the borrower takes out a mortgage at the limit of their financial capacity, especially if they have some combination of a low income, an insecure job and poor savings habits.

Bad credit home loans can also be dangerous if the borrower buys a home in a stagnant or falling market – because if the home has to be sold, they might be left with ‘negative equity’ (where the home is worth less than the mortgage).

That said, bad credit home loans can work out well if the borrower is able to repay the mortgage – for example, if they borrow conservatively, have a decent income, a secure job and good savings habits. Another good sign is if the borrower buys a property in a market that is likely to rise over the long term.

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.

Who offers 40 year mortgages?

Home loans spanning 40 years are offered by select lenders, though the loan period is much longer than a standard 30-year home loan. You're more likely to find a maximum of 35 years, such as is the case with Teacher’s Mutual Bank

Currently, 40 year home loan lenders in Australia include AlphaBeta Money, BCU, G&C Mutual Bank, Pepper, and Sydney Mutual Bank.

Even though these lengthier loans 35 to 40 year loans do exist on the market, they are not overwhelmingly popular, as the extra interest you pay compared to a 30-year loan can be over $100,000 or more.

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.

How much is the first home buyer's grant?

The first home buyer grant amount will vary depending on what state you’re in and the value of the property that you are purchasing. In general, they start around $10,000 but it is advisable to check your eligibility for the grant as well as how much you are entitled to with your state or territory’s revenue office.

What is equity? How can I use equity in my home loan?

Equity refers to the difference between what your property is worth and how much you owe on it. Essentially, it is the amount you have repaid on your home loan to date, although if your property has gone up in value it can sometimes be a lot more.

You can use the equity in your home loan to finance renovations on your existing property or as a deposit on an investment property. It can also be accessed for other investment opportunities or smaller purchases, such as a car or holiday, using a redraw facility.

Once you are over 65 you can even use the equity in your home loan as a source of income by taking out a reverse mortgage. This will let you access the equity in your loan in the form of regular payments which will be paid back to the bank following your death by selling your property. But like all financial products, it’s best to seek professional advice before you sign on the dotted line.

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. 

Can I get a home loan if I am on an employment contract?

Some lenders will allow you to apply for a mortgage if you are a contractor or freelancer. However, many lenders prefer you to be in a permanent, ongoing role, because a more stable income means you’re more likely to keep up with your repayments.

If you’re a contractor, freelancer, or are otherwise self-employed, it may still be possible to apply for a low-doc home loan, as these mortgages require less specific proof of income.