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Housing finance continues to fall as banks tighten serviceability

Housing finance continues to fall as banks tighten serviceability

Today’s ABS housing finance figures show a continued fall in home loan lending as the fallout from the banking Royal Commission sets in.

ABS data released today shows a 0.9 per cent drop in investor lending and an 0.2 per cent in all lending from the previous month, according to the seasonally adjusted figures from the ABS.

While these falls are relatively minor, it shows a continued slide in home loan lending. Investors have dropped 15 per cent over the year, while the total lending figures have dropped 3.2 per cent annually. 

RateCity spokesperson Sally Tindall said today’s figures were further evidence of the cooling of the Sydney and Melbourne housing markets, fuelled by the tightening of banks’ lending criteria.

“APRA has been very clever in motivating the banks to improve their serviceability policies,” she said.

“Findings from the Royal Commission have also had a major impact on loan application processes, with increased scrutiny on paperwork at every step in the process.

“If you’re looking for a home loan, it’s now vitally important to get all your ducks in a row before applying,” she said.

APRA’s serviceability guidelines include:

  • interest rate floors of above 7 per cent
  • interest rate buffers of at least 2 per cent.
  • greater scrutiny of high debt to income borrowers and
  • the implementation of maximum debt to income levels.

Tips for assessing how much you can borrow:

  • Make sure you have a decent deposit of at least 20 per cent
  • Check you can comfortably service your mortgage if rates hit 8 per cent.
  • Be prepared for increased paperwork.
  • Consider cancelling excess credit cards as they could hurt your capacity to borrow.

ABS Housing Finance April figures – percentage change

Annual

Quarterly

Monthly

Total

-3.2%

-3.6%

-0.2%

Owner-occupier housing finance

+4.2%

-0.7%

+0.2%

Investor housing finance

-15.0%

-8.7%

-0.9%

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Fact Checked -

This article was reviewed by Research Director Sally Tindall before it was published as part of RateCity's Fact Check process.

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Learn more about home loans

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).

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.

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.