Is it about to get more difficult to get a home loan, investment loan, or refinance your existing mortgage in Australia..?
Based on the commentary and data that is being released, this looks to be likely over the coming months and years. Reserve Bank of Australia (RBA) Assistant Governor, Michelle Bullock, recently flagged that regulators are watching the lending standards of Australia’s banks, as well as household debts levels as the growth in consumer debt, is outpacing income growth.
It was also recently announced that Australia’s Treasurer, Josh Frydenberg, has backed the regulators in Australia to reduce the amount of high-debt home loans, which has been rising significantly due to the lift in house prices as well as record-low interest rates. The data shows that there are currently approximately 22% of new residential mortgage loans are at least six times the level of annual income from the applicant, which is a significant jump from 16% just a year earlier. It is understandable that there are some concerns amongst the regulators here and they’re exploring ways to ensure financial stability is not disrupted to too great an extent.
To put this in perspective, and highlight why this could be of concern, let’s consider a simple scenario that is all too common in Australia:
Let’s assume Bob & Sue own their own home in Sydney and bought the property in June 2021 for $2.5M. We’ll just assume that Bob & Sue contributed a 20% deposit of $500,000 and covered their stamp duty and purchase costs with cash. This means that they now have a $2M mortgage on their property. If we assume that the interest rate on this mortgage is 1.8%, an achievable rate for owner-occupiers in this market, this results in repayments of $7,194 per month. If interest rates were to rise to 4%, which they will very likely do within the span of their 30 year home loan, the repayments would jump to $9,549 per month. This may not sound like too significant a jump, but let’s consider this.
If we assume that Bob is earning $240,000 per annum, while Sue is earning $160,000, this provides them with a household income of $400,000 per annum. At the interest rate of 1.8%, this means that their repayments are just 21.6% of their gross income, but at 4%, this climbs to 28.65%. If we start to factor in an average tax rate of 30%, this means that $163,692 in before-tax dollars is needed just to cover the mortgage repayments or more than 40% of their household income. When we start to think about interest rates returning to 5 – 7%, this starts to get more concerning.
When we start exploring the data, it’s easy to understand why regulators are starting to explore what can be done to reduce the level of highly-geared households around Australia. We can therefore assume that the regulators and lenders will start to make it more difficult to borrow over the coming months and years, but what could these changes look like. There are a number of possibilities, and we’ve highlighted a few such options below, however, it’s important to note that we do not have a crystal ball here and are merely speculating about what could be possible.
- Option 1 – A higher deposit requirement for investors
We could see the regulators ensure that banks and lenders require a higher deposit, such as 30 or 40%, for those looking to purchase a residential investment property. This would be similar to what happened in parts of New Zealand. This would certainly limit the attraction of the New Zealand property market as an investment destination for many and would make a number of investors look elsewhere, whilst also not impacting to too great an extent the first home buyers just trying to get into their own home. However, this could be very difficult to enforce, as many may simply state that they’re buying a holiday home, or move into the home for a short period of time just to allow access to the 20% deposit requirement.
- Option 2 – Cap on total borrowing per household
Another option that we could see is a total limit of the amount that can be borrowed per household. This may be a multiple of income and/or assets, or structured in a different way, but would certainly mean that once a certain threshold was met that no further debt could be accessed until some of it was paid off.
- Option 3 – Interest rate differentials
One of the key changes that we saw brought into the market in 2017 was amendments to the pricing for interest-only and investment debt. All of a sudden, it became significantly more expensive to get an interest-only loan relative to a P&I loan. The same was true for investment loans, with owner-occupier loans offering one of the cheapest and most attractive rates. By enforcing a loan interest rate differential based on the loan to income ratio, total debt, or otherwise, may also act to achieve the same outcomes.
There are a number of ways that the regulators could look to tackle this. From an investor’s and homeowner’s perspective, it’s important to consider your options, do your homework and seek professional advice to discuss your situation and what you’re looking to achieve. If you’re looking at buying your own home, purchasing an investment property, or otherwise, it may be time to start acting and exploring what you can achieve. Feel free to reach out to our team at Loansuite to discuss what could be possible for you today.
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