UTS professor brings balance to housing debate

UTS professor brings balance to housing debate

Mortgage lending and property prices are in freefall, with potentially damaging consequences for the Australian economy. Should we blame APRA?

Housing finance fell 20.6 per cent in the year to January, according to the latest ABS data. That included falls of 17.1 per cent for owner-occupiers and 28.6 per cent for investors.

Property prices have also been falling. National values fell 6.3 per cent in the year to February, according to CoreLogic, including declines of 10.4 per cent in Sydney, 9.1 per cent in Melbourne and 6.9 per cent in Perth.

Some think APRA, the banking regulator, is to blame, after progressively tightening lending standards from December 2014.

A downturn might’ve happened without APRA intervention

However, housing finance expert Harry Scheule says it’s simplistic to hold APRA solely responsible for this housing downturn.

“There’s no hard evidence to say APRA has caused a fall in property values,” says Professor Scheule, who is Professor of Finance at the University of Technology Sydney.

Harald-Scheule

“Having said that, the changes that APRA has implemented have probably had some impact on the availability of credit.”

That, in turn, has had an impact on property prices, says Professor Scheule. However, it’s impossible to know how much of the downturn has been caused by APRA and how much has been caused by other factors, he adds.

What are those other factors? Well, non-housing sectors of the economy have also slowed. Australia has made it harder for overseas investors to buy local real estate. China has made it harder for its citizens to invest money in other countries (such as Australia). Also, during the boom years, property prices grew faster than wages, which, Professor Scheule says, always leads to a correction.

So when you put those factors together, there might have been a reduction in mortgage lending and property prices even without APRA’s intervention.

APRA’s mandate covers banking, not housing

Many commentators and stakeholders have called on APRA to ease up on its market intervention.

However, Professor Scheule points out that the regulator has actually suggested that there might still be a little more tightening to come.

“What I don’t know is whether now, given the current climate, given the current house price declines, that will be adopted, but last year, APRA was on the way to further tightening. That might be reconsidered in the current climate,” he says.

Professor Scheule stresses, though, that if APRA did ease up, it would not be because it wanted to influence property prices.

That’s because APRA does not have a mandate to prop up the housing market – unless a downturn was so severe that it threatened the stability of the banking system.

“APRA has no mandate to make economic policy,” he says.

“APRA’s mandate is to safeguard Australia’s banks – and not only the banks, but to safeguard Australia’s depositors.

“It’s not APRA’s mandate to make economic policy: that’s the domain of the RBA and government.”

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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.

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.

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.

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.

How do I know if I have to pay LMI?

Each lender has its own policies, but as a general rule you will have to pay lender’s mortgage insurance (LMI) if your loan-to-value ratio (LVR) exceeds 80 per cent. This applies whether you’re taking out a new home loan or you’re refinancing.

If you’re looking to buy a property, you can use this LMI calculator to work out how much you’re likely to be charged in LMI.

How common are low-deposit home loans?

Low-deposit home loans aren’t as common as they once were, because they’re regarded as relatively risky and the banking regulator (APRA) is trying to reduce risk from the mortgage market.

However, if you do your research, you’ll find there is still a fairly wide selection of banks, credit unions and non-bank lenders that offers low-deposit home loans.

How do I take out a low-deposit home loan?

If you want to take out a low-deposit home loan, it might be a good idea to consult a mortgage broker who can give you professional financial advice and organise the mortgage for you.

Another way to take out a low-deposit home loan is to do your own research with a comparison website like RateCity. Once you’ve identified your preferred mortgage, you can apply through RateCity or go direct to the lender.