Households had more money in the June quarter despite COVID-19: ABS

Despite the calamity of a once-in-a-century pandemic that led to almost a million jobs being lost, household income went up in the June quarter due to record social security payments, the nation’s statistical body revealed.

Households had about 2.2 per cent more income during the months of April, May and June this year, the Australian Bureau of Statistics (ABS) said, even though there was widespread unemployment, a record drop in work hours and a fall in compensation. 

The extra money in people’s wallets was a result of record government subsidy payments, namely Jobseeker and Jobkeeper, which helped hedge the financial impact of the COVID-19 pandemic, Dr David Gruen said, the Australian Statistician heading the ABS.

"One after another, statistical records toppled in the June quarter, demonstrating the unprecedented impact on Australia of the pandemic,” he said.

“We saw a 9.8 per cent fall in hours worked, while JobKeeper and Boosting Cash Flow for Employers were the largest and second largest subsidies ever recorded in the National Accounts.”

Stimulus payments did some heavy lifting, but not all of it: ABS

Social assistance payments -- such as the $550 COVID-19 fortnightly supplement and the one-off $750 economic support payment -- pushed the increase in social support payments to 41.6 per cent for the June quarter.

The lift in social security benefits coincided with 932,000 jobs being shed in the first half of the year, the ABS said, the vast majority due to the rippling consequences of COVID-19. The number could’ve been higher were it not for the government’s JobKeeper business subsidy, an initiative that totalled $31 billion in payments over the June quarter, the ABS said.

The subsidies were not the only reasons behind the extra money in people’s wallets. Investment income -- from rent and dividend payments -- was attributed for the lift too.

But the sting of the pandemic did affect the returns these investments were paying, according to the ABS. Rental income dropped 25.7 per cent, while many businesses reduced their dividend payments or deferred them altogether, the ABS said.

A savings bunker: ABS

There was more money coming in, but people spent less and banked more of it, according to the ABS data. 

Household spending tumbled over the quarter by 12.1 per cent -- pushing the figure down for the year by 2.6 per cent. 

Meanwhile, the household-savings-to-income ratio increased from 6 per cent to 19.8 per cent in the June quarter -- to its highest level since June 1974.

In dollars, net savings went up from $42 billion to $59.5 billion.

A fall and rebound in household borrowing: ABS

The lockdowns instituted in response to the coronavirus pandemic took a toll on the housing market as loan commitments dropped, the ABS said.

“These restrictions, in combination with the broader economic uncertainty caused by COVID-19, drove a sharp decline in housing market activity with large falls in the value of new housing loan commitments in April and May,” they said. 

“The 11.6 per cent seasonally adjusted fall in May was the largest in the history of the series.”

With the general easing of restrictions came a rebounding in commitments in the quarter. 

June recovered by 6.2 per cent, but this was still down 10 per cent compared to the recent peak in January, the ABS said, and it wasn’t enough to offset the downturn.

The first rental fall in almost 50 years: ABS

Property investors felt the first fall in the rental market since 1972 and it was a drop of 1.3 per cent, according to the ABS data. 

The fall is owed to a confluence of factors wrought by the COVID-19 pandemic, such as a drop in overseas travellers and international students, as well as lockdown restrictions.

The drop in these prospective tenants happened as newly built properties were being let onto the market, the ABS said, and the resulting oversupply could have contributed to rising vacancy rates and falling rents in some capital cities.

 

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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.

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 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

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 guarantor?

A guarantor is someone who provides a legally binding promise that they will pay off a mortgage if the principal borrower fails to do so.

Often, guarantors are parents in a solid financial position, while the principal borrower is a child in a weaker financial position who is struggling to enter the property market.

Lenders usually regard borrowers as less risky when they have a guarantor – and therefore may charge lower interest rates or even approve mortgages they would have otherwise rejected.

However, if the borrower falls behind on their repayments, the lender might chase the guarantor for payment. In some circumstances, the lender might even seize and sell the guarantor’s property to recoup their money.

How do I take out a low-deposit home loan?

If you want to take out a low-deposit home loan, it might be a good idea to consult a mortgage broker who can give you professional financial advice and organise the mortgage for you.

Another way to take out a low-deposit home loan is to do your own research with a comparison website like RateCity. Once you’ve identified your preferred mortgage, you can apply through RateCity or go direct to the lender.

What is breach of contract?

A failure to follow all or part of a contract or breaking the conditions of a contract without any legal excuse. A breach of contract can be material, minor, actual or anticipatory, depending on the severity of the breaches and their material impact.

What happens when you default on your mortgage?

A mortgage default occurs when you are 90 days or more behind on your mortgage repayments. Late repayments will often incur a late fee on top of the amount owed which will continue to gather interest along with the remaining principal amount.

If you do default on a mortgage repayment you should try and catch up in next month’s payment. If this isn’t possible, and missing payments is going to become a regular issue, you need to contact your lender as soon as possible to organise an alternative payment schedule and discuss further options.

You may also want to talk to a financial counsellor. 

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Real Time RatingsTM was developed to save people time and money. A home loan is one of the biggest financial decisions you will ever make – and one of the most complicated. Real Time RatingsTM is designed to help you find the right loan. Until now, there has been no place borrowers can benchmark the latest rates and offers when they hit the market. Rates change all the time now and new offers hit the market almost daily, we saw the need for a way to compare these new deals against the rest of the market and make a more informed decision.

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A method of gauging a borrower’s home loan serviceability (ability to afford home loan repayments), the debt service ratio (DSR) is the fraction of an applicant’s income that will need to go towards paying back a loan. The DSR is typically expressed as a percentage, and lenders may decline loans to borrowers with too high a DSR (often over 30 per cent).