Investment rentals face vacancies, lower rent and mortgage defaults due to border closures: Corelogic

Investment rentals face vacancies, lower rent and mortgage defaults due to border closures: Corelogic

Investors face empty properties, lower rents and a tougher time servicing their mortgage due to overseas migration falling to its lowest level in more than a century, analysts warn.

Australia’s population growth is forecast to fall 56 per cent -- from 350,000 in 2019 to 154,000 in June 2021 -- to its lowest level since 1917 largely due to a shortage of tourists and migrants, according to recent projections from the Treasury.

The fall in overseas migration -- to 31,000 in the financial year ending in 2021 from 232,000 a year earlier -- could have sweeping implications on the rental market as they constitute a large portion of tenants, Tim Lawless said, head of research at CoreLogic.

“The implications of net overseas migration remaining well below average are broad ranging,” he said.

“...The likely outcomes of low net overseas migration will be higher volume of rent listings, and falling rent values across key inner city precincts.”

The effects are already taking place: Corelogic

The trend can already be seen in rental properties located in inner Sydney and Melbourne, Mr Lawless said, as the border closures instituted to curb the spread of COVID-19 prevents migrants from entering the country and signing leases.

“Investors who own property in these locations are likely to be facing high vacancy rates, lower rents and reduced ability to service their mortgage,” he said.

“This may result in more distressed sale listings in these regions.”

Unit rents in Melbourne and Sydney have fallen more than 4 per cent since March, Mr Lawless said, outpacing the falls of other cities.

International students may help demand in these areas rebound once international travel restrictions are eased, he said, but until then, these areas face the risk of being sold “at a valuation lower than contract price”.

Demand is down, but a flood of units are coming

The weakened demand brought about by a drop in migration numbers could be met by an oversupply of developments in some cases, CoreLogic said.

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 Australian Bureau of Statistics building data cited by CoreLogic.

“A large proportion of these are high rise projects in inner city locations,” Mr Lawless said.

“Many … will settle while rental vacancies remain high and rents are falling, which may put downwards pressure on property values.”

Demand for the type of apartments that typically appeal to investors will remain law, he said, adding developers should pivot towards owner-occupier projects driven by low interest rates and the government’s HomeBuilder scheme.

The suburbs expected to be impacted the most

About 84 per cent of overseas migrants flowed into Sydney and Melbourne, mainly finding places to rent around the city where apartments are commonplace, or in the suburbs close to tertiary institutions and transport hubs, such as Parramatta in Sydney or Clayton in Melbourne.

Rental vacancies have already shot up in these areas as a result of overseas migration drying up, CoreLogic said.

The number of homes available to rent in Melbourne’s Southbank rose by 117 per cent to 1230, between mid-March to early August, while Melbourne’s CBD saw a 105 per cent rise to 2184 rental listings.

The number of available homes across central Sydney -- the CBD, Haymarket and the Rocks -- similarly experienced a spike in rental listings. Over the same March to August period, ads increased by 111 per cent to 1230.

But the rise in vacant apartments is not solely owed to a fall in overseas migrants, Mr Lawless said. 

“The demand shock in these areas has been broader than the impact of stalled net overseas migration,” he said. 

“Rental demand is also impacted by weaker labour market conditions amongst highly casualised industry sectors such as food, accommodation, arts and recreation workers. 

“...Additionally, fewer workers may be demanding rentals in the CBD’s due to remote working arrangements.”

Banks slash interest rates for investor mortgages 

Lenders have been slashing interest rates for investor mortgages out of cycle to official cash rate cuts.

A RateCity analysis found 47 mortgage lenders reduced their interest rates over the last two months; of which, 27 offered rates below 2.5 per cent.

The cuts -- from major lenders including NAB and Macquarie Bank, as well as smaller players such as Homestar Finance -- were about 0.27 per cent on average, for those made from mid-June to mid-August.

Average variable rates (P&I and IO)
  Owner-occupiers (%) Investors (%)
March 2020 3.90 4.21
August 2020 3.55 3.90
% change Mar-Aug 2020 -0.35 -0.31
Average fixed rates (P&I and IO)
March 2020 3.52 3.74
August 2020 3.04 3.20
% change -0.48 -0.54
Average rates (fixed and variable, P&I and IO)
March 2020 3.69 3.92
August 2020 3.26 3.48
% change -0.43 -0.44

Source: RateCity.

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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 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 the best interest rate for a mortgage?

The fastest way to find out what the lowest interest rates on the market are is to use a comparison website.

While a low interest rate is highly preferable, it is not the only factor that will determine whether a particular loan is right for you.

Loans with low interest rates can often include hidden catches, such as high fees or a period of low rates which jumps up after the introductory period has ended.

To work out the best value for money, have a look at a loan’s comparison rate and read the fine print to get across all the fees and charges that you could be theoretically charged over the life of the loan.

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 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.

Can I refinance if I have other products bundled with my home loan?

If your home loan was part of a package deal that included access to credit cards, transaction accounts or term deposits from the same lender, switching all of these over to a new lender can seem daunting. However, some lenders offer to manage part of this process for you as an incentive to refinance with them – contact your lender to learn more about what they offer.