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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 20203.904.21
August 20203.553.90
% change Mar-Aug 2020-0.35-0.31
Average fixed rates (P&I and IO)
March 20203.523.74
August 20203.043.20
% change-0.48-0.54
Average rates (fixed and variable, P&I and IO)
March 20203.693.92
August 20203.263.48
% change-0.43-0.44

Source: RateCity.

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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

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.

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.

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.

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. 

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.

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).

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

How much deposit do I need for a home loan from NAB?

The right deposit size to get a home loan with an Australian lender will depend on the lender’s eligibility criteria and the value of your property.

Generally, lenders look favourably on applicants who save up a 20 per cent deposit for their property This also means applicants do not have to pay Lenders Mortgage Insurance (LMI). However, you may still be able to obtain a mortgage with a 10 - 15 per cent deposit.  

Keep in mind that NAB is one of the participating lenders for the First Home Loan Deposit Scheme, which allows eligible borrowers to buy a property with as low as a 5 per cent deposit without paying the LMI. The Federal Government guarantees up to 15 per cent of the deposit to help first-timers to become homeowners.

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.

What is a low-deposit home loan?

A low-deposit home loan is a mortgage where you need to borrow more than 80 per cent of the purchase price – in other words, your deposit is less than 20 per cent of the purchase price.

For example, if you want to buy a $500,000 property, you’ll need a low-deposit home loan if your deposit is less than $100,000 and therefore you need to borrow more than $400,000.

As a general rule, you’ll need to pay LMI (lender’s mortgage insurance) if you take out a low-deposit home loan. You can use this LMI calculator to estimate your LMI payment.

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.