Homes could sell at a loss as time ticks for struggling borrowers with mortgage deferrals

Homes could sell at a loss as time ticks for struggling borrowers with mortgage deferrals

More property owners could be facing losses when selling this year as mortgage repayment deferrals come to an end, though investors may be more susceptible to risk, according to a property analytics firm.

While a wave of forced sales has not happened, some lenders have suggested distressed mortgage holders – many of them investors – consider selling before the home loan repayment deferral ends, CoreLogic has said in its latest Pain and Gain report. 

“This could see an increase in loss-making sales over the following two quarters, particularly in more high-risk, investor concentrated markets,” the CoreLogic report said. 

Nationally, 12.8 per cent of the 52,000 housing sales tracked by CoreLogic made losses in the three months to June, up by half a percentage point during this period.

While not a significant jump, CoreLogic pointed out that the share of property sales that made losses is “relatively high historically”, sitting at the highest level since August 2019.

The rate is also above the five-year average of 9.8 per cent.

Across the capital cities, 13.3 per cent of properties changed hands at a loss, an increase of 90 basis points over the June quarter. The proportion was 12.1 per cent across the combined regional markets, up by 20 basis points.

Mortgage holidays and low rates protect housing market

The real estate market has been relatively cushioned from the pandemic and recession by a combination of mortgage holidays and government stimulus packages, keeping property listings at low levels.

“Mortgage repayment deferrals have reduced the incidence of distressed sales, and kept stock level low, which may have supported dwelling prices,” the report said.

Low home loan interest rates have also helped prevent significant price reductions, which would likely have bumped up the rate of loss-making sales in the market.

Twelve mortgage lenders have at least one interest rate below 2 per cent, while 87 lenders have at least one rate below 2.5 per cent, RateCity data showed. 

The lowest variable rate on offer is Reduce Home Loans’ 1.89 per cent, but only applies to mortgage holders with up to 60 per cent loan-to-value-ratio (LVR).

The lowest two-year and three-year fixed rates are both at 1.99 per cent, from:

Struggling owners not forced to sell yet

Many property owners who may have otherwise struggled with repayments have been supported by bank and government relief, and have avoided the need to sell in the June quarter, CoreLogic said.

Values fell by 0.8 per cent across the country in the three months to June, but dropped by 1.1 per cent in the three months to October, showing a slightly more rapid fall. October marked the fifth month in a row of decreasing housing prices.

Would-be sellers may have also been reluctant to let go of their properties in a market where prices are edging down, the report suggested.

Recent surveys have shown buyers are feeling confident about securing a bargain in the spring property market but cautious sellers are sensing this sentiment and are holding on to their properties. 

Gateway Bank chief executive officer Lexi Airey said buyers should be prepared for what could be tense competition in the spring selling season.

“If sellers hold off (listing their properties), this may heighten competition among buyers for their ideal property,” she said.

“It could also lead to some tough negotiation around prices.”

Owner-occupier houses have better chances of profitability

Houses held for longer periods by owners who lived in them were generally more likely to sell at a profit, the CoreLogic report also found.

Nationally, 89.6 per cent of houses made profits when sold in the June quarter, compared with 79.3 per cent of units. 

Units were more likely to be unprofitable due to the high level of apartment development seen since 2013.

But the June quarter marked the highest proportion of loss-making sales in seven years, despite houses generally having a higher likelihood of being sold at a profit.

The median profit for houses across the country was $229,873 in the same period, while the median loss was -$50,000.

For units, sellers made a median profit of $142,000 and a median loss of -$46,000.

The proportion of investors selling at a loss was higher than owner-occupiers, with 18 per cent of investors closing loss-making deals, compared with 11 per cent of owner-occupiers.

The report also found that sellers who had held a property for longer before selling generally made a bigger profit.

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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.

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

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.

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.

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.

Is there a limit to how many times I can refinance?

There is no set limit to how many times you are allowed to refinance. Some surveyed RateCity users have refinanced up to three times.

However, if you refinance several times in short succession, it could affect your credit score. Lenders assess your credit score when you apply for new loans, so if you end up with bad credit, you may not be able to refinance if and when you really need to.

Before refinancing multiple times, consider getting a copy of your credit report and ensure your credit history is in good shape for future refinances.

I have a poor credit rating. Am I still able to get a mortgage?

Some lenders still allow you to apply for a home loan if you have impaired credit. However, you may pay a slightly higher interest rate and/or higher fees. This is to help offset the higher risk that you may default on your repayments.

I can't pick a loan. Should I apply to multiple lenders?

Applying for home loans with multiple lenders at once can affect your credit history, as multiple loan applications in short succession can make you look like a risky borrower. Comparing home loans from different lenders, assessing their features and benefits, and making one application to a preferred lender may help to improve your chances of success

Will I be paying two mortgages at once when I refinance?

No, given the way the loan and title transfer works, you will not have to pay two mortgages at the one time. You will make your last monthly repayment on loan number one and then the following month you will start paying off loan number two.

If I don't like my new lender after I refinance, can I go back to my previous lender?

If you wish to return to your previous lender after refinancing, you will have to go through the refinancing process again and pay a second set of discharge and upfront fees. 

Therefore, before you refinance, it’s important to weigh up the new prospective lender against your current lender in a number of areas, including fees, flexibility, customer service and interest rate.