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How will the end of mortgage deferrals affect the housing boom?


Australia’s red-hot property market has enjoyed extraordinary support from the federal government’s economic stimuli, wage subsidies and leniency in lending policy from the banks.

A key question now is how the market will adjust as this COVID-19 induced emergency support is wound back.

At the height of the worst peace-time recession in a century last year, banks pulled out all stops to avoid a meltdown in the asset that dominates their loan books: residential property.

Home loan and small business customers were given an option of putting their loan repayments on hold, and hundreds of thousands took up the offer. At the peak, banks allowed some $250 billion in small business loans and home loans to be put on hold.

These deferrals officially ended at the end of March and banks say the vast majority of affected customers have returned to making mortgage repayments. However, a small minority are still struggling – some may need to eventually sell their properties.

Commonwealth Bank provides a case in point. It says the overwhelming majority of people who deferred have returned to making repayments or restructured their loans. About 1.9 per cent are working with teams that help sell properties.

The bank has a moratorium on forced sales by owner-occupiers until September.

CBA retail banking group executive Angus Sullivan expects the end of deferrals would have a “very, very marginal” impact on the supply of homes for sale, as it would probably be overpowered by the stimulatory impact of ultra-low interest rates.

“I think the driver of the housing market, first and foremost, is probably low rates,” Sullivan says.

CBA’s rivals have experienced similar trends. National Australia Bank had 1037 deferred home loans at the end of February after allowing about 110,000 people to pause repayments last year.

“Given the significant number of customers who have returned to making repayments and additional support available, we don’t expect the end of deferrals to have a material impact on the housing market,” says NAB’s group executive for personal banking Rachel Slade.

Westpac has about 2000 loans in deferral – a tiny proportion of its mortgage book, while official figures last week showed ANZ Bank had 0.9 per cent of its housing loans in deferral at the end of February.

However, the end of mortgage deferrals could still weigh on some parts of the property market.

CoreLogic research director Tim Lawless says the risk from deferred loans has “significantly diminished,” though parts of the market dominated by investors could still feel the impact of deferrals ending.

Banks have not said where most of the remaining deferred loans are located, but Lawless says they are probably concentrated among investors, particularly in inner-city Sydney and Melbourne apartment developments. He believes banks would start being less patient with struggling property investors.

“Just reading between the lines, it seems like there will probably be less flexibility for investors,” he says. “It’s a net negative for the housing market but I think the impact will be quite localised.”

Like the banks, Lawless believes the broader property market has enough momentum to offset the impact of loan deferrals ending, but he does not think the pace of price growth can continue for much longer.

It is clearly not sustainable for Australia to continue notching up the fastest growth in house prices since the 1980s at a time when household incomes are not rising. It will simply get too expensive for buyers to keep bidding up prices.

The end of JobKeeper and other government schemes, including building grant program HomeBuilder, are also likely to temper the red-hot demand for housing in the months ahead.


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The RBA has lifted the cash rate to 0.35 per cent. Here’s what it means for home buyers and owners

cash rate lifted

Borrowers could see higher mortgage repayments within weeks, with the Reserve Bank of Australia (RBA) increasing the official interest rate for the first time in more than a decade.

The RBA board on Tuesday decided to increase its cash rate target by 25 basis points to 0.35 per cent, in a bid to control inflation which, according to the most recent figures from the ABS, is rising at its fastest pace in 21 years.

So now that the cash rate has gone up and is predicted to continue rising over the coming months, what will this mean for home buyers and home owners with mortgages?

How will rising interest rates affect home buyers? 

Buyers looking to enter the property market could see a reduction in their borrowing power as a result of the cash rate increase.

When banks approve home loan applications, they assess borrowers’ ability to repay their home loans at an interest rate several percentage points higher than the mortgage rate, known as the assessment rate.

With interest rates and mortgage repayments now rising, some potential borrowers may see a reduction in the maximum amount of money they could otherwise have borrowed, as lenders look to ensure that borrowers will be able to continue repaying their home loans, even at higher interest rates.

Buyers may experience different levels of reduction to their borrowing power, depending on their circumstances and the lender, says Gregory Boustead, home loan specialist at Domain Home Loans.

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How much will mortgage repayments increase when interest rates rise?

mortgage repayments

It’s the million-dollar question on home owners’ minds: When will interest rates rise and how will that affect home loan repayments?

While economists and the big four banks expect the Reserve Bank of Australia (RBA) to increase the cash rate target from June, no one knows for certain when rates will rise and by how much.

 An increase to the cash rate will see borrowers with variable-rate home loans facing higher mortgage repayments, assuming banks pass on rate hikes to customers, which is highly likely.

But whether you’re on a fixed or variable rate home loan, it’s worthwhile reviewing your mortgage before the cash rate increases, says Lianna Mills, senior home loan specialist at Domain Home Loans.

“Sitting and waiting for [an increase] to happen will not benefit home owners,” she says. “It’s important to look at your home loan now.”

So when are interest rates expected to go up and how high are rates predicted to rise?

When will interest rates rise?

The conditions for a cash rate hike – full employment, sustained wage growth and increasing inflation – are expected to be met in June, says AMP Capital’s chief economist, Shane Oliver.

“You can make an argument conditions have already been met,” he says. “But the Reserve Bank doesn’t want to raise rates in an election campaign, so they won’t be hiking in May.”

If interest rates do rise in June, borrowers with variable-rate home loans may have about a month to prepare for an increase in their mortgage repayments.

But how high the cash rate will rise could be the difference between paying tens of dollars or hundreds of dollars more per month.

Each month, the Reserve Bank of Australia (RBA) board meets and sets the cash rate target, sometimes referred to as the “official” interest rate. The cash rate serves as a benchmark for home loan interest rates, which are normally a few percentage points higher. Lenders often adjust their variable interest rates based on movements of the cash rate, but aren’t obliged to do so.

What could the first interest rate hike be?

The RBA has historically moved the cash rate in 0.25 per cent increments. Therefore, it’s possible the RBA will move in line with historic trends, Mr Oliver says.

“The general expectation is that the first hike will be to get us back to 0.25 per cent, which will be a 0.15 per cent hike,” he says. “Thereafter, the Reserve Bank would move in 0.25 per cent increments.”

home loan

Source: Domain Home Loans Repayment Calculator
The above table shows the approximate amounts monthly home loan repayments could increase if interest rates rise. Based on a 30-year principal and interest loan with an initial 2.5% interest rate. Information is intended as a guide only. Fees and charges excluded. 

If the cash rate increased by 0.15 per cent, borrowers with a $500,000 mortgage on a 30-year term could expect to pay an additional $39 per month on their home loan repayments. For those with a $1 million mortgage, it could mean an additional $79 per month.

mortgage repayments

For borrowers on a variable rate home loan, the amount their repayments increase will depend on the size of their mortgage and how high the cash rate goes. Photo: Greg Briggs

However, it’s possible the RBA will conclude that 0.15 per cent is too small of an increase, and may start with a larger hike to show a stronger commitment to keeping inflation down, Mr Oliver says.

“I think this first hike might actually be 0.4 per cent,” he says. “If we work on the basis that the RBA wants to get back to 0.25 per cent increments, they may want [the target] at 0.5 per cent and, to do that, they’ve got to go 0.4 per cent.”

If the cash rate increased by 0.4 per cent, borrowers on the same $500,000 mortgage could expect to pay an additional $106 per month. For those on the same $1 million mortgage, it could mean an additional $211 per month.

How high could interest rates get?

Much like asking when the cash rate will rise, economists will tell you there’s no easy answer when it comes to how high the cash rate will climb over time.

“It’s a bit of a guessing game at this point,” Mr Oliver says. “We don’t know how households will respond to increases in interest rates for the first time since 2010, particularly given that they’re coming from record lows.”

mortgage repayments

The RBA will take increased levels of household debt into consideration when deciding how high to raise the cash rate. Photo: Vaida Savickaite

But because of increased levels of household debt, Mr Oliver says the RBA won’t need to raise interest rates to 5 or 6 per cent, as they have done historically, to get inflation back under control.

He expects the cash rate to reach 1 per cent by the end of 2022 and 1.5 per cent by 2023. Thereafter, if inflation substantially decreases, he expects the rate could drop again.

The big banks offer mixed forecasts for the peak of the rate-tightening cycle. Commonwealth Bank expects the cash rate to peak at 1.25 per cent in early 2023, while Westpac predicts a peak of 2 per cent in mid-2023. ANZ expects the cash rate to reach 2 per cent by the end of 2023, and NAB has forecast a peak of 2.25 per cent by the end of 2024.


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Do you really need to save a 20 per cent deposit?

first-home buyers

More first home buyers are giving up on saving a 20 per cent deposit, as sky-high property prices blow out the time it takes to pull together a down payment on a home.

Aspiring homeowners have been flocking to government loan guarantee schemes and the bank of mum and dad in a bid to get into the market faster amid rapidly rising prices. Others are forking out extra money for lenders mortgage insurance, so they can buy with a smaller deposit.

“It’s not really the goal,” Melbourne mortgage broker Daniel Koutzamanis, director of BLVD Finance, said of reaching the traditional 20 per cent deposit. “With first-home buyers, the conversation is more around what’s the minimum I need … to get a foot in the door.”

Few of his first home buyer clients have saved a 20 per cent deposit and were instead taking out lenders mortgage insurance, which is required when borrowing more than 80 per cent of a property’s value.

About 30 per cent of clients had turned to their family for a cash gift or loan guarantee, waiving the need for LMI. The federal government’s now rebranded and expanded Home Guarantee Scheme has also proven popular, but spots for those buying existing properties ran out quickly.

It was a similar story on Sydney’s northern beaches, where at least a third of first home buyers were getting help from the bank of mum and dad via a cash gift, loan or guarantee, said mortgage broker James Algar, principal at Mortgage Choice Dee Why. However, the government scheme was of little use there, with entry-level unit prices topping the price threshold.

“First home buyers are still striving to get to that 20 per cent, but not a high number are actually getting to it, especially not in our area,” he said.

Already almost 60,000 people have used the Home Guarantee Scheme, which enables first home buyers and single parents to purchase with a 5 per cent and 2 per cent deposit respectively, without the need for LMI. Another 50,000 places will now be available per year, as announced in last week’s federal budget.

“[Saving a 20 per cent deposit has] really become unrealistic for a lot of people, the expansion of the scheme is … an admission that it’s very hard, and getting harder,” said Richard Whitten, editor of home loans at Finder.

First home buyers were often encouraged to cut back on small daily pleasures and buckle down on spending to save a deposit, Mr Whitten said. But such sacrifices barely made a dent in the time taken to save a deposit, given property prices nationally climbed 18.2 per cent over the past year to $738,975, on the latest CoreLogic figures.

Prospective homebuyers in Sydney would need to give up 52,191 takeaway coffees to save enough for a median home deposit, Finder modelling shows, or skip more than 11,000 meals out. Their Melbourne counterparts would need to skip about 35,700 coffees or some 8050 meals out before the savings equated to a 20 per cent deposit.

“People fixate on coffee or brekkie out, but that doesn’t help that much, it’s overall budgeting,” he said, noting larger scale switches like finding a more affordable rental or moving back home with family, where possible, had a much greater impact on savings.

Though buying with a smaller deposit resulted in higher repayments, and more money spent on interest, first-home buyers would still be better off buying sooner rather than later in a rapidly rising market, Mr Whitten said.

However, with price growth flattening, the pressure on first home buyers had eased slightly, and those close to a 20 per cent deposit might decide to spend a few more months saving rather than rushing to purchase now.

Mr Algar is already seeing some first home buyers, mostly those able to live in the family home, now delaying plans to purchase, deciding they would rather keep saving as prices were no longer running away from them.

“[They’re more likely to] say I’ll sit tight because I don’t think I’ll pay any more for a property in a year’s time,” he said.

For those close to a 20 per cent deposit, a few more months saving could give them greater lending options, Mr Algar said. For a smaller deposit, getting to at least 10 per cent, could see a big reduction in LMI costs.

He had yet to hear concerns from first home buyers about the risk of falling into negative equity, if they purchased with a small deposit in a cooling market, but felt it was something they should be mindful of.

Mortgage broker Anthony Landahl, managing director of Equilibria Finance, said some first home buyers were sitting back on their hands, but more due to affordability constraints, and he expected to see a pickup in activity with the expanded government scheme.

With interest rate hikes on the horizon, some first home buyers may be reluctant to borrow as much as they previously might have, but he felt there would still be many who borrowed to their full capacity.

More than half of his first home buyer clients were not saving a 20 per cent deposit, and those who needed assistance were more likely to turn to family help than the government schemes, which had limited availability, and price caps that were too low in some markets.


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