Housing prices could spiral as 15 per cent struggle to resume mortgage repayments

Housing prices could spiral as 15 per cent struggle to resume mortgage repayments

About 15 per cent of people who deferred their mortgages are at risk of not being able to resume repayments, according to the nation’s central bank, possibly leading to a sell-off of homes at a loss and a ‘housing fall’. 

Australia has generally dealt with the financial fallout of the COVID-19 pandemic resiliently, the Reserve Bank of Australia (RBA) has said, but the economic forecast is uncertain and “substantial risks” remain.

The bank’s Financial Stability Review, a biannual report assessing the state of the financial system and the risks to its stability, found about 15 per cent of mortgage holders who deferred repayments will likely not be able to resume them. 

“Some borrowers may be able to restructure their debt (such as by extending the term or temporarily switching to interest-only payments) and lower their repayments,” the RBA said.

“However, some borrowers may need to sell their property to repay their debt.”

The Australian Banking Association revealed more than 900,000 people had deferred their personal and business mortgage repayments, as of September -- indicating about 135,000 people would struggle to resume their repayments.

Banks are currently contacting 450,000 mortgage holders to discuss their options and resume repayments. 

A small percentage of people on a mortgage holiday are expected to be in arrears if the unemployment rate hits a projected 10 per cent, the RBA said. It estimates about 2 per cent of all deferrals -- approximately 18,000 -- would default on their loans. This is double the current average, they said.

High unemployment, due mortgages and falling JobSeeker

An increase in distressed sales could lead to the housing market experiencing a fall.

“If many borrowers were to attempt to sell because they are unable to meet their repayments, and demand is weak, housing prices could fall,” the RBA said.

“Large and sustained price falls could lead to losses for borrowers and lenders.” 

Housing prices have fallen for the last five months, according to analysts CoreLogic, anchored by falls in Melbourne and Sydney. The typical home lost about $12,500 since the beginning of the year, according to the Australian Bureau of Statistics. 

National housing prices remain 1.5 per cent below the April 2020 peak, the RBA said.

The fall in housing values has contributed to about 3 per cent of loans having negative equity; that is, having a mortgage that is higher than the value of their property.

“The share of all loans in negative equity would roughly double if prices were to fall by a further 10 per cent,” the RBA said, “and for a 20 per cent decline, the share would increase seven-fold.”

If house prices were to continue to fall then, there is a potential scenario where selling them would not cover the debt.

Loans currently in negative equity are mostly in Queensland, Western Australia and the Northern Territory, the RBA said, where some regions had large housing price falls during the unwinding of the mining investment boom.

Economists have walked back projections of 10 to 15 per cent falls in the housing market following containment of the virus, however the possibility of a second wave remains. 

Property investor sales could ‘exacerbate housing price falls’

A health measure instituted to help prevent the spread of COVID-19 is particularly impacting property investors, who may sell off their investments in large enough numbers to further exacerbate a fall in housing prices.

Closed borders and travel restrictions have led to a fall in tourists, international students and migrants, cutting off a large group of people who would typically rent properties from investors.

An estimated 31,000 overseas migrants are expected for the financial year ending in 2021, according to CoreLogic. This represents a fall from 232,000 compared to the previous year.

Most of these migrants would’ve rented properties in Sydney or Melbourne, and their absence has contributed to an increase in rental vacancies in the two cities. 

“Extended periods of vacancies could lead to mortgaged investors struggling to afford repayments, and deciding to sell their properties,” the RBA said.

“This has the potential to exacerbate housing price falls, particularly in areas with more investor properties.”

The rental consumer price index fell in the June quarter for the first time in the 48 years records have been kept, according to the RBA, a phenomenon that it said took place because of rental reducations and cheaper rental listings.

Newly built investment properties 

Years before the coronavirus, planning and development began on tens-of-thousands of apartment buildings in the nation’s largest cities. 

More than 50,000 units were under construction in NSW and more than 45,000 were being built in Victoria as of the end of March, according to the ABS.

And many of these are about to be put up for sale in an economic environment already grappling with oversupply and weak demand, the RBA said.

“For newly completed apartments, sales are now being settled in very different economic conditions,” they said. 

“While there is little evidence of higher settlement failures to date, risks are elevated given the economic uncertainty and potential for further price declines.”

The National Housing Finance and Investment Corporation (NHFIC) claims the drop in demand for rental properties has proven so severe that from 129,000 to 232,000 fewer apartments, townhouses and houses could be developed within the next three years.

Building approvals are on the decline, according to data from the ABS. The number of apartments, townhouses and houses approved for development dropped by 1.6 per cent to 13,691 in the month of August. Offsetting a rise of 4 per cent in freestanding homes was a drop of 11 per cent in apartments, villas and townhouses. 

“Large falls in underlying dwelling demand, particularly due to substantial falls in international students, are already putting upward pressure on vacancy rates and downward pressure on rents in inner city suburbs,” NHFIC said.

“If sustained, this could cause a contraction in construction activity that will add to the recessionary forces that are impacting the economy.”

 

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This article was reviewed by Finance Writer Alison Cheung before it was published as part of RateCity's Fact Check process.

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Learn more about home loans

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.

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. 

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.

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.

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 is mortgage stress?

Mortgage stress is when you don’t have enough income to comfortably meet your monthly mortgage repayments and maintain your lifestyle. Many experts believe that mortgage stress starts when you are spending 30 per cent or more of your pre-tax income on mortgage repayments.

Mortgage stress can lead to people defaulting on their loans which can have serious long term repercussions.

The best way to avoid mortgage stress is to include at least a 2 – 3 per cent buffer in your estimated monthly repayments. If you could still make your monthly repayments comfortably at a rate of up to 8 or 9 per cent then you should be in good position to meet your obligations. If you think that a rate rise would leave you at a risk of defaulting on your loan, consider borrowing less money.

If you do find yourself in mortgage stress, talk to your bank about ways to potentially reduce your mortgage burden. Contacting a financial counsellor can also be a good idea. You can locate a free counselling service in your state by calling the national hotline: 1800 007 007 or visiting www.financialcounsellingaustralia.org.au.

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.

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.

What percentage of income should my mortgage repayments be?

As a general rule, mortgage repayments should be less than 30 per cent of your pre-tax income to avoid falling into mortgage stress. When mortgage repayments exceed this amount it becomes hard to budget for other living expenses and your lifestyle quality may be diminished.

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.

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We are giving away, for one lucky entrant, the chance to win $1 million. Here’s how it will work:

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What are the benefits of getting a pre-approved home loan from Citibank?

While hunting for your dream home, getting a Citibank home loan pre-approval can have multiple benefits, which include:

  • You'll have an idea on your personal price range, which can save time to find your home.
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  • A Citibank pre-approved home loan is a commitment  by a lender that signals you're ready to jump into the property market.

You can apply for pre-approval by providing basic details, such as name, email, and phone number on the bank’s website. Alternatively, you can contact the bank on 1300 361 922 or find a home lending officer on the website.

Is a home equity loan secured or unsecured?

Home equity is the difference between its current market price and the outstanding balance on the mortgage loan. The amount you can borrow against the equity in your property is known as a home equity loan.

A home equity loan is secured against your property. It means the lender can recoup your property if you default on the repayments. A secured home equity loan is available at a competitive rate of interest and may be repaid over the long-term. Although a home equity loan is secured, lenders will assess your income, expenses, and other liabilities before approving your application. You’ll also want  a good credit score to qualify for a home equity loan. 

How can I qualify for a joint home loan if my partner has bad credit?

As a couple, it's entirely possible that the credit scores of you and your partner could affect your financial future, especially if you apply for a joint home loan. When applying for a joint home loan, if one has bad credit, there may be steps that can help you to qualify even with bad credit, including:

  • Saving for a higher deposit, ideally 20 per cent or more. Keep in mind:  a borrowed amount of less than 80 per cent of the property value also saves the cost of Lender's Mortgage Insurance (LMI).
  • Consistent employment records, regular savings habits, and an economical lifestyle can help prove financial stability and responsibility. These can improve your chances of approval even if there are some negative marks on a credit report.
  • Delaying your decision to buy a property until your partner’s credit score improves. Alternatively, you may want to consider a solo application.

While these tips may assist, if you find this overwhelming, consider consulting an expert advisor who can offer personal guidance based on your financial situation.