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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How can I get ANZ home loan pre-approval?

Shopping for a new home is an exciting experience and getting a pre-approval on the loan may give you the peace of mind that you are looking at properties within your budget. 

At the time of applying for the ANZ Bank home loan pre-approval, you will be required to provide proof of employment and income, along with records of your savings and debts.

An ANZ home loan pre-approval time frame is usually up to three months. However, being pre-approved doesn’t necessarily mean you will get your home loan. Other factors could lead to your home loan application being rejected, even with a prior pre-approval. Some factors include the property evaluation not meeting the bank’s criteria or a change in your financial circumstances.

You can make an application for ANZ home loan pre-approval online or call on 1800100641 Mon-Fri 8.00 am to 8.00 pm (AEST).

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.

How much are repayments on a $250K mortgage?

The exact repayment amount for a $250,000 mortgage will be determined by several factors including your deposit size, interest rate and the type of loan. It is best to use a mortgage calculator to determine your actual repayment size.

For example, the monthly repayments on a $250,000 loan with a 5 per cent interest rate over 30 years will be $1342. For a loan of $300,000 on the same rate and loan term, the monthly repayments will be $1610 and for a $500,000 loan, the monthly repayments will be $2684.

How long does NAB home loan approval take?

The time required to get your home loan from NAB approved can vary based on a number of factors involved in the application process. 

Once you have applied for a home loan, a NAB specialist will contact you within 24 hours over the phone to take down relevant information, including your total income, debts (existing loans, credit cards, etc.), assets (car, shares, etc.), and your monthly expenses (food, utility bills, etc.). Your lender might also ask for information related to the property you want to purchase, including the type of dwelling and preferred postcode.

NAB will then verify all your information and check your credit score, and if the details stack up, you should be given a conditional approval certificate. This certificate stipulates how much money NAB is willing to lend you and is typically valid for 90 days. 

Once you have your conditional approval, you can start browsing for properties that you like and that fit within the budget that NAB has provided. After you find a suitable property, you’ll need to give a copy of the signed deed to NAB, following which you should get full approval and access to the funds. This process can take up to 4-6 weeks. 

Can I take a personal loan after a home loan?

Are you struggling to pay the deposit for your dream home? A personal loan can help you pay the deposit. The question that may arise in your mind is can I take a home loan after a personal loan, or can you take a personal loan at the same time as a home loan, as it is. The answer is that, yes, provided you can meet the general eligibility criteria for both a personal loan and a home loan, your application should be approved. Those eligibility criteria may include:

  • Higher-income to show repayment capability for both the loans
  • Clear credit history with no delays in bill payments or defaults on debts
  • Zero or minimal current outstanding debt
  • Some amount of savings
  • Proven rent history will be positively perceived by the lenders

A personal loan after or during a home loan may impact serviceability, however, as the numbers can seriously add up. Every loan you avail of increases your monthly installments and the amount you use to repay the personal loan will be considered to lower the money available for the repayment of your home loan.

As to whether you can get a personal loan after your home loan, the answer is a very likely "yes", though it does come with a caveat: as long as you can show sufficient income to repay both the loans on time, you should be able to get that personal loan approved. A personal loan can also help to improve your credit score showing financial discipline and responsibility, which may benefit you with more favorable terms for your home loan.

How to break up with your mortgage broker

If you find a mortgage broker giving you generic advice or trying to sell you a competitive offer from an unsuitable lender, you might be better off  breaking up with the mortgage broker and consulting someone else. Breaking up with a mortgage broker can be done over the phone, or via email. You can also raise a complaint, either with the broker’s aggregator or with the Australian Financial Complaints Authority as necessary.

As licensed industry professionals, mortgage brokers have the responsibility of giving you accurate advice so that you know what to expect when you apply for a home loan. You may have approached the mortgage broker, for instance, because you have questions about the terms of a home loan a lender offered you. 

You should remember that mortgage brokers are obliged by law to act in your best interests and as part of complying with The Australian Securities and Investments Commission’s (ASIC) regulations. If you feel you didn’t get the right advice from the mortgage broker, or that you lost money as a result of accepting the broker’s suggestions regarding a lender or home loan offer, you can file a complaint with the ASIC and seek compensation. 

When you first speak to a mortgage broker, consider asking them about their Lender Panel, which is the list of lenders they usually recommend and who may pay them a commission. This information can help you decide if the advice they give you has anything to do with the remuneration they may receive from one or more lenders.