Life can present unexpected challenges and financial difficulties are a common concern. So, what can a mortgage broker do for clients who say they’re struggling?

A mortgage broker helps borrowers connect with lenders and seeks out the best lender for the borrower’s financial situation.

First and foremost, it’s essential to foster open and empathetic communication with clients. When clients express their financial struggles, it’s a sign they trust us and see us as a valuable resource. Listening attentively to their concerns is the first step in offering support.

Brokers can often be the initial point of contact for clients grappling with financial difficulties. Clients typically approach brokers with concerns about rising repayments and the challenges they face in meeting them.

Validating their concerns helps build trust and creates a safe space for honest discussions. To provide the best guidance, it’s crucial to review their financial situation thoroughly and trust plays a big part in this. Gathering all relevant financial information, including income, expenses and outstanding debts allows us to identify the root causes of their struggles.

Cracking the code with lenders

Brokers often face the challenge of discerning their obligations and differentiating them from the lender’s responsibilities. Under the National Credit Code, lenders are required to consider hardship arrangements when borrowers apply and state their inability to meet credit contract obligations, however, this section of the Code is broad and open to interpretation.

While lenders must determine when a hardship notice has been given, brokers play a pivotal role in recognising signs of hardship and guiding clients on how to communicate effectively with their lender.

Brokers serve as the main point of contact for many borrowers, and their ability to recognise signs of hardship and advise clients on how to approach lenders is paramount.

They have strong relationships with multiple lenders and can use these connections to negotiate on behalf of the client.

Lenders have a wide array of instruments at their disposal; depending on the circumstances, there may be various mortgage options available to alleviate their financial burden. This could involve refinancing to secure a lower interest rate, consolidating debts, extending the loan term to reduce monthly payments, payment holidays, temporary interest reductions, extending loan terms and looking at hardship applications with the lender.

Overcoming financial hardship

With the mounting pressures on consumers and small businesses due to rising interest rates and the soaring cost of living, the need for hardship assistance has become increasingly prevalent. Some clients may be unable to reprice or switch lenders, leading to potential financial hardship scenarios.

The struggles faced by Australian borrowers have garnered significant attention. A recent study by Roy Morgan revealed over 1.5 million borrowers are at risk of mortgage stress, with nearly a quarter of homebuyers allocating half their income to mortgage payments.

This precarious situation has prompted two thirds of homebuyers to request that their credit providers monitor their financial well-being to prevent payment defaults.

Financial hardship, however, should not be confused with occasional lapses, short-term unforeseen expenses, or temporary payment timing issues. It typically arises when clients experience significant life events such as job loss, illness, income reduction, relationship breakdown, or business failure, making it challenging to meet financial commitments.

In challenging times, it is a mortgage broker’s responsibility to stand by their clients, offering not just financial solutions but also unwavering support.

Collaborating with a financial planner can be beneficial for clients facing financial challenges. They can create a realistic budget and financial plan tailored to their specific needs, helping clients regain control of their finances.

I firmly believe in empowering my clients with financial knowledge. Educating them about responsible financial practices and the importance of maintaining a good credit score can prevent future challenges.

Interest rates add to burden

In most cases, when the RBA hikes the official cash rate, banks and lenders are quick to follow suit raising the rates of variable rate home loan borrowers.

The 29 per cent of borrowers in mortgage stress, the highest since May 2008, reflects the repercussions of the Reserve Bank’s interest rate hikes throughout this year.

The number of households deemed “at risk” of mortgage stress has swelled by a staggering 642,000 this year. Michele Levine, CEO of Roy Morgan, warns that further interest rate hikes could exacerbate this crisis, possibly inching closer to the record high of 35.6 per cent observed in May 2008 during the Global Financial Crisis.

If you find yourself in this situation, be sure to reach out for professional assistance to prevent matters deteriorating unnecessarily or excessively.

This article was co-written by Sasha Bennett

With the Reserve Bank of Australia set to raise rates throughout 2022 and the banks following without hesitation, is it time for homeowners and investors to reshape their bank finance?

The Reserve Bank of Australia (RBA) has lifted its official cash rate by 25 basis points to 0.35 per cent, the first such upward movement since November 2010.

With markets pricing in the virtual certainty of another rise in June to take the cash rate target to at least 0.5 per cent, there is a degree of fear among many home owners and investors who face the prospect of repayments that stretch already-pressured household budgets.

If passed on in full by banks, the rate rise will add more than $65 a month to repayments on a $500,000 mortgage, and double that on a million-dollar loan.

Whatever the outcome for individual property owners or investors, industry leaders suggest there are numerous ways to prepare your mortgage and minimise interest rate rise shockwaves.

Time to refinance?

Now is the perfect time for homeowners and investors to review the interest rates attached to their borrowings.

Zippy Financial Director and Principal Broker Louisa Sanghera said as interest rates rise it will become harder to qualify for a new loan and is all the more reason to refinance.

“A 0.25 per cent difference to an investor not only eats away at their income, but it can make a difference to them being positively or negatively geared, which in turn could cost them in tax,” she said.

According to Two Red Shoes founder and mortgage broker Rebecca Jarrett-Dalton, if you haven’t reduced your rate during the last two years, you should definitely look at refinancing.

“Variable rates are so competitive, why wouldn’t you try and save some interest?” Ms Jarrett-Dalton said.

Mortgage broker at Specialist Mortgage, Carolyn Xaftellis, agreed one of the best reasons to refinance a home loan was to lower the interest rate on an existing loan.

“Refinancing can be a great financial move if it reduces your home loan repayment, shortens the term of your loan, or reduces the amount of interest you pay across the entire loan term.

“On a $500,000 principal and interest loan a drop of 0.5 per cent will save $135 per month,” Ms Xaftellis said.

However, it’s not just the interest rate that will make an impact.

“It’s important to look at initial and ongoing fees and the use of interest reducing facilities such as an offset account,” she said.

“An offset account with an average balance of $25,000 on a 3.19 per cent principal and interest loan will save $797 per year in interest costs, which will reduce the balance of the loan and overall loan term,” she said.

Paying regular attention to changes in lender offerings is also important, suggested Specialist Mortgage’s Senior Finance Executive, Bridget Bowman.

“If your current lender is not prepared to offer a competitive rate, there will be another lender that will.

“This can often result in savings of thousands of dollars over the course of a year, so it’s definitely worth asking the question,” Ms Bowman told API Magazine.

Fixing the problem

The decision whether to fix a rate or go with the variable alternative is, according to Ms Jarrett-Dalton, “crystal ball territory”.

“This one is a very hard one to answer,” Ms Jarrett-Dalton said.

“The standard caveat applies – it depends on your personal needs and circumstances, how long you plan to keep the property, how much extra you can repay, etc, but more than this, if you are fixing a rate right now you are effectively giving yourself a rate increase before the banks do so,” Ms Jarrett-Dalton said.

This is because the offered fixed rates currently are an average of 1 per cent to 2 per cent higher than variable rates.

Borrowers are largely ditching fixed rate home loans. Fixed rate lending is, at 28 percent of new lending in February, way down from a peak of 47 percent in July last year.

“You might still think this is worthwhile if it lets you sleep at night or if you think rates will rise more than this amount during the term you choose.

“For example, two-year fixed rates are hovering on average in the high 3 per cents; do you think variable rates will rise more than one full per cent within the next two years for you to have been better off in your fixed rate from now?”

Mortgage Choice and Smartline National Sales Director David Zammit said ultra-low fixed interest rates are now a thing of the past.

“To put things into perspective, the lowest fixed rate on the Mortgage Choice panel of lenders today is 2.69 per cent p.a. and the lowest variable rate offered by a lender on our panel is 1.89 per cent,” he said.

“Borrowers are responding – Mortgage Choice home loan submission data showed that in March, 20 per cent of loans had a fixed component (80 per cent variable) compared to March last year when 39 per cent of loans had a fixed component (62 per cent variable).

“That said, RBA rate rises will push up the cost of variable interest rates.

“Those borrowers looking for certainty will still favour fixing their rate so they know their maximum repayments for that period of time,” he said.

Making mortgage calculations

The quickest way to assess how a rate rise will impact a homeowner or investor is to use their lender’s online repayment calculator, says Specialist Mortgage’s Bridget Bowman.

“This allows customers to determine how much a percentage rate rise will impact them in terms of dollars.”

Ms Jarrett-Dalton said there is much that goes into a loan assessment, so it’s not as simple as only using a calculator.

“But if you’re going to, avoid the borrowing capacity calculators as these are very rough only – and stick to a simple loan comparison or simple maths; your current loan balance, multiplied by the potential interest rate saving, then divide this by 12 if you’d like a monthly figure,” she said.

After entering the loan amount and interest rate, Ms Sanghera recommends increasing the interest rate in the calculator by 0.25 per cent increments to see how their mortgage could potentially rise.

“I would recommend doing this up to, say, an interest rate of five or six per cent.

“If you are worried you cannot manage the potential repayments, then you should go and speak to your broker, who can restructure the debt to reduce repayments, or they could look to fix the interest rate on your home loan,” she said.

Rates and property prices

Historically, rate rises have led to property price growth being restricted.

“We are already seeing our clients paying under the asking price and sales agents advertising “price adjusted” so prices are already slowing down,” Ms Sanghera said.

Ms Jarrett-Dalton has also witnessed hesitancy from property owners.

“People are factoring in price drops.

“If they aren’t yet in the market, they are also hopeful and waiting for a bargain.

“This is in itself a little bit self-fulfilling.

“Definitely as rates rise and it’s a little harder and dearer to borrow, this will have an impact but the biggest factor still seems to remain supply versus demand and this is without inward migration.”

While affordability is also a key concern, Carolyn Xaftellis suggested the cost of borrowing is likely to remain well below long-term averages.

“There will be continued housing demand for an extended period of time,” she said.

“Other factors to consider are trends in labour markets, demographic patterns, supply levels and affordability, which will all play a key role in how housing markets perform in different parts of the county.”

Optimistically, REINSW CEO Tim McKibbin’s overview is that in the current environment an interest rate rise is unlikely to result in too many mortgagors being pushed into difficulty.

“Through APRA, banks are already required to build into a finance facility the capacity for a mortgagor to absorb additional costs to service the debt,” he said.

A rate rise is also likely to create competition between banks.

“The competition between banks to win your business is going to be intense, so use your broker to make sure you get the best deal,” David Zammit said.

Applying for finance as a first-time investor can be a complicated process that features several subtle differences from obtaining a loan for a property intended to be lived in.

But if investors have a solid understanding of what lenders are looking for, the process can be as smooth as applying for owner-occupier finance.

Specialist Mortgage director of finance Helen Avis told Australian Property Investor Magazine that there were several crucial pieces of information a first-time investor needed to know before making an application.

“They need to know the full financial process – their borrowing capacity, how much cash is required to settle and their loan options, whether they lock in a variable or a fixed rate loan, and the fees associated with the finance,” Ms Avis said.

“They should be made aware of the timeline for the financing process and should have a pre-approval in place before making offers on a property.

“And they will need to appoint a conveyancer to assist with the legal aspect of buying a property.”

The biggest factor that the banks are looking for, Ms Avis said, was that there will be sufficient income – earned and rental – to support loan payments after deducting liabilities and expenses.

Other differences between owner-occupier and investment loans include the maximum loan-to-value ratio that banks are willing to lend on, as well as higher interest rates for investors as compared to borrowers who intend to live in the property.

Rebecca Jarrett-Dalton, founder of Sydney-based mortgage broker Two Red Shoes, said many investors were also not aware of the subtle differences between lenders.

“We sit in a really privileged position where we can overlook all of the lender policies and there are so many different nuances in policies coming into play at the moment, so it’s actually really challenging for somebody to get it right by walking in the door of their local bank branch,” Ms Jarrett-Dalton told API Magazine.

Ms Jarrett-Dalton said lenders would differ on the maximum debt-to-income ratio they allow, while there were several things a prospective borrower could do to ensure that ratio does not hold them back from achieving their goals.

“All of the standard stuff applies – getting your house in order, not spending all your money on Uber Eats, expanding your income as much as possible, reining in any unnecessary liabilities or expenses all helps you,” Ms Jarrett-Dalton said.

“For a first time investor, a crucial factor is knowing what you want to get out of it.

“Even as foolish as it sounds, you need to know your exit strategy before you begin and decide which type of property.”

Ms Jarrett-Dalton said understanding the drivers behind investing and what an investor’s future goals are was crucial in the decision-making process around what to buy.

“Every property is the right property for the right person. It’s not that there are wrong properties, but it might cost you more to hold a particular property as an investment,” she said.

“If you bought in Sydney at the moment, it’s going to cost you a lot more to hold the property because rents are so far behind property prices.

“But if you bought in a more regional area, you will get a greater rent return against your dollar spend.

“Neither of them are the wrong property, they’re just for the right purchaser.”

And Ms Jarrett-Dalton said buying a property that’s heavily negatively-geared for tax deduction purposes may seem like a sound strategy, but it could also put a handbrake on potentially building a portfolio.

“If your goal is to buy 10, just to pluck a number out of the air, and your first one is so heavily negative, that’s going to really hold you back.

“We are seeing a lot of popularity in regional dual-occupancy properties – houses with granny flats, or a duplex on a property, if you bought that one first, that’s probably going to help you moving forward.”

Ms Dalton also shared her top tips on what lenders may consider when assessing an investment loan application:

  • Rental income
  • Running costs
  • Your debt-to-income ratio
  • Have your documents in order
  • Understand your goals and find the right property

Covid-19 is having an ever-changing impact on many things for all of us, with travel and movement restrictions, self-isolation, business shutdowns and job losses at an early stage in Australia.

The Government has been quick to act with support measures for many of those affected to reduce the impact, however there remains an understandable level of fear and misinformation floating around.

We have prepared the below summary to help you understand some of the issues being discussed and considered in regard to lending in Australia to help those affected.

It is essential to start with the clear and indisputable fact that if you haven’t been impacted through job loss, loss of rent or severe economic hardship then no actions will be available to you. There will be a requirement to provide evidence of the change in circumstances, so please understand that you can’t simply try and seek change under the hardship provisions unless you can indeed show clear evidence that something has occurred.

It is nice to know that these safeguards are in place if something happens to you, but please do not try and exploit the situation if it doesn’t.

For those that have been already impacted

Most banks are now willing to consider changes to your current lending if you have indeed been adversely impacted by the economic consequences of Covid-19.

To qualify, you will need to either:

In these cases, banks are willing to:

For those not impacted

If you have not been directly affected by Covid-19, then the banks are still assessing their options on existing clients, including whether or not to pass on the recent official interest rate cuts for investor loans.

There are some special fixed rates now available for owner-occupiers where they have passed on the recent reductions by up to 0.7%pa.

We do expect some further announcements shortly and will keep you posted.

The banks are currently offering higher discounts on variable interest rates, so if you haven’t had your loan reviewed recently, please contact us to ensure you are getting the best discount on your lending.

New loans

Despite the current environment, banks are still willing to lend for new purchases and refinances.

Some restrictions may apply to employment in certain industries directly impacted by Covid-19 such as travel and tourism.

We would be pleased to help you further evaluate your options and assist in ensuring that you are achieving the best result for your circumstances. Simply email us at [email protected] to connect with one of our professional team members near you.

Living overseas as an expat can be a fantastic move financially and can allow you to progress up the property ladder quickly. When purchasing off-the-plan property, however, there can be a few additional hurdles to consider when applying for finance.

Living the life of an expat has plenty of benefits. You are generally paid extremely well and in many cases get to live rent-free in some of the most vibrant cities in the world.

On the flip side, for those Australians living and working overseas, the big catch can come when looking to gain finance to buy a property, back home. If you are looking to purchase off-the-plan, this process can be even tougher as it comes with some additional considerations.

If you are going to buy an off-the-plan property, it is well worth taking a few key steps early on in the piece to make sure everything is in order.

Gaining finance: it’s a process

When purchasing off-the-plan, it is important for you to have your financial position assessed early. In most instances, there is no subject to finance clause, and if settlement is 1 – 2 years away, there is the potential for market conditions or your personal circumstances to change during this time.

At least four months prior to the anticipated settlement, revisit your application, and make sure your ability to service the loan is still good before deciding who is the most suitable lender.

When the application is submitted and processed, the completed property is valued, loan documents are issued, then settlement can occur.

In terms of LVR – what is required?

For an expat, 80% is the maximum LVR achievable; however, It could potentially be reduced to 70% depending on the lender’s policy for using foreign income.

Risks to watch out for

Generally speaking, as an expat, you can get finance if you meet the usual criteria, such as having a good credit history, a stable income and meet serviceability. Issues can occur; however, when you are earning money in a currency that might not be considered as stable as the Aussie Dollar.

For off-the-plan finance, each lender will only finance a certain number of units per development. As an expat your more limited in your choice of lender, therefore it’s important to have your application submitted and approved early. You should also arrange for the final valuation to occur on the first day that the valuers are allowed in, to ensure that you are one of the first in line to gain formal approval.

Also, it’s important to note that when you purchase an off-the-plan property you pay a 10% deposit, therefore if you cannot settle, your deposit is at risk.

Protect yourself through careful planning

It’s sensible planning to ensure that you have a buffer of cash available in case the valuation comes in lower than you had previously anticipated, or at the very least have some equity available in another property, so you can still settle on the purchase.

A great way to get financially ahead

Living the life of an expat can often be a great way to get ahead financially, and it is the perfect opportunity to put some of that additional income to work by investing in property.

If you are well prepared and understand the process, getting finance for an off-the-plan property shouldn’t be a problem as an expat.

 

One of the most powerful things about investing in property is your ability to leverage the equity in your existing home or investment property.

One of the most powerful things about investing in property is your ability to leverage the equity in your existing home or investment property.

When you start to use that leverage, you can quickly take one property and build that into a portfolio that can set you up and allow you to achieve your financial goals.

If you already own an existing Australian property, you may have equity available which can be used towards purchasing another property without the need to put in your own cash. This is particularly beneficial for investors as they can maximise their investment by negatively gearing the property, leaving their cash available for other investments.

So how can potential investors leverage their current equity to purchase their next investment property?

Understanding the Loan-to-Value Ratio (LVR)

Equity is the current value of your property minus the outstanding loan. The banks will lend up to 80% of this amount without the need to pay Lenders Mortgage Insurance or up to 90% with Lenders Mortgage Insurance.

Risks to watch out for

As you would have a higher loan on the property, this, in turn, means that your annual holding costs on the property are higher than if you put in the cash deposit yourself.

To minimise this risk, you should ensure you are purchasing a quality property that you feel will increase in value each year by more than the annual holding cost of the property.

An example

John owns a property worth $450,000 and currently has a loan of $250,000 over the property. He doesn’t want to incur Lenders Mortgage Insurance so would like to keep his maximum loan to value ratio at 80%. His equity is calculated is as follows:

$450,000 ( value of the existing property) x 80% = $360,000 maximum loan available on existing property.

$360,000 ( maximum loan) – $250,000 (existing loan) = $110,000 equity available to use towards a new purchase.

The $110,000 in equity then needs to cover the 20% deposit on a new property, as well as roughly 5% for the costs of purchase such as stamp duty and legal fees.

In this case, John was able to purchase a property for $440,000 using the $110,000 in equity from his existing property – $88,000 of this went towards the 20% deposit and the remaining $22,000 covered his costs of purchase.

He then also had a new loan of $352,000 secured against the new property so he did not need to contribute any of his own cash to this purchase.

As the value of both of his homes continues to grow over time, John will be able to access that additional equity to continue to build his property portfolio. The more quality properties he owns, the faster that equity adds up.

The power of leverage

It really doesn’t take long to build yourself a very powerful property portfolio when you start leveraging your existing equity.

Buying an off-the-plan property is a great way to enter the property market, but there are a few considerations you need to know about when it comes to financing a new purchase.

There are many advantages to purchasing off-the-plan, despite the fact that your new home still hasn’t been built. Not only can you access possible tax benefits through depreciation, but you also get a brand new home with all the new fixtures and fittings.

Another key advantage is that you often only need to come up with a 10% deposit; however, the financing process has a few nuances that new buyers need to be aware of.

Have your finance in order ASAP

When buying off-the-plan make sure you have your finance in order as soon as possible. Submit your application up to four months prior to settlement. Once approval is granted, you will have to wait until the building is finished and valued before everything can be signed off and you can move in.

What is required in terms of LVR?

The LVR your lender requires depends on a few different factors. A key consideration is always based on whether the property is for an owner occupier or an investment. The size and location of the new building is also significant because if it is in a high-risk postcode or if the development has more than 50 units, this will impact the LVR requirements.

Generally speaking, the maximum LVR you would be able to access as an owner-occupier is 90/95% and 80-90% for investors.

Prepare for potential risks

One of the key considerations is that when you purchase an off-the-plan property you are having to sign the contract far in advance of moving in, which means there is a risk that lending policies might change between that time and final settlement.

Market conditions may also change, and the valuation of your new property, when completed, may come in lower than you anticipate. Be sure to have a buffer of cash, so you can settle even if the final valuation is on the low side and you aren’t able to access the full amount you need from your lender. It’s also important to note that failure to settle means you lose your 10% deposit.

Overcoming any hurdles

When purchasing a property off-the-plan, it is crucial to ensure that you are in a position to pass the servicing requirement for the total loan amount, at the date of settlement.

Having an additional buffer of cash available in case of lower lending or lower valuation is a good idea as well.

It is also essential to understand the area that you are looking to buy into. If the particular suburb has a large pipeline of new stock coming onto the market, then you might need to be careful as this could weigh on the final valuation when you are looking to settle.

An example of the process

When you have selected your new property, check that you can qualify for the loan amount required at settlement. Once the contract is signed, and a deposit of 10% is paid nothing further is required until nearer settlement. Then at least four months prior to settlement prepare the application for submission and make sure you have a cash buffer in place.

A great way to enter the market

Overall, buying off-the-plan property is a great way to get into the market, and at times you might even be able to access favourable lending terms with the help of the developer.

While there is some risk when it comes to gaining finance,  given the time between signing the contract and final settlement, most of these risks can be overcome by fully understanding the process and planning for a final valuation that is in a range, rather than a set figure.

Disclaimer

All information provided in this article is of a general or factual nature only and does not take into account your personal circumstances or objectives. Before making any decisions, you need to consider, with or without the assistance of a licensed adviser or broker, the appropriateness of any material presented in light of your individual needs and circumstances. The information in this article does not constitute a recommendation for any of the products or services provided by SMATS Services (Australia) Pty Ltd and or any of its related entities.

Article Q&A

What is the maximum LVR?

The maximum LVR you would be able to access as an owner-occupier is 90-95% and 80-90% as an investor.

By leveraging the equity in your current property, you can quickly take that one property…and build a portfolio that can fast-track you towards your financial goals.

By leveraging the equity in your current property, you can quickly take that one property… and build a portfolio that can fast-track you towards your financial goals.

If you already own a house or investment property, you may have equity available that you can put to use for your next.

So how can you leverage your current equity to make that next purchase?

Your equity amount is the current value of your property minus the outstanding loan.  Banks will lend up to 80% of this amount for a new purchase without Lenders Mortgage Insurance or up to 90% with.

A risk to watch out for: with a higher loan on the property, annual holding costs are more than if you put in the cash deposit yourself.

To minimise this risk, ensure that you are purchasing a quality property that you feel will increase in value each year by more than the annual holding cost of the property.

The power of leverage. It really doesn’t take long to build yourself a very powerful property portfolio when you start leveraging your existing equity.

Whether you are hoping to create that dream home or looking to make a solid investment, purchasing a block and building new is a great option. As with any purchase, understanding the financial process and any potential risk is key to your overall success.

As a potential homeowner or investor, building your property from scratch comes with many benefits.  Control over design specifications, fewer maintenance issues moving forward, lower energy costs and the ability to access greater tax incentives through depreciation make this an attractive option for many buyers.

A further financial upside of buying a block and then building is that stamp duty is only paid on the land, not the construction, therefore reducing your overall costs.

If this is the choice for you, securing finance is one of the first steps –  as without funding, a construction project will never get off the ground.

So how do you go about financing your build, and what are some of the potential risks to look out for?

It’s a process: securing finance

The process of financing a new build is different from established property as it involves two distinct components: land and construction.

You can obtain a packaged finance product that covers both: when signing the land contract you will be required to put down a 10% deposit, and then a 5% deposit when signing the construction contract.

On settlement of the land, you will pay your full contribution for the land and the build cost. The bank will then settle the balance for the land, and finance the entire build cost.

Interest is charged on the amount drawn, so initially, this will only be on the land component of the loan.

Generally, there are five staged payments to complete a house. After each stage is completed, the bank will pay the invoice and interest will be charged as each drawdown is made.

What is required in terms of LVR?

The required Loan to Value ratio (LVR), which is the amount of a loan compared to the value of the property, will differ for buyers looking to purchase their own home compared to those looking to invest.

For owner-occupier applicants, 90% finance or even up to 95% finance through some lenders is achievable.  While for investors looking to obtain land and construction finance, 90% is currently the maximum.

Both homeowners and investors looking to borrow over 80% of the total land and construction value are required to obtain Lenders Mortgage Insurance (LMI).  In some cases, this can be added to the loan, while in other instances, depending on the lending limit, the LMI needs to be paid on settlement.

Potential pitfall: and how to avoid it

Before signing a contract, potential investors or future homeowners should always obtain pre-approval, so they can be confident that their bank or financial institution will lend the total amount of financing required to settle.

Both contracts for the land and construction can be signed subject to finance. Then, the total land and construction project can be valued prior to the purchase becoming unconditional; to help ensure enough funding is secured and there is no shortfall.

An example

Let’s look at the breakdown of the numbers on a project with a land price: $300k and construction cost: $300k.

Land price: $300k

Construction cost: $300k

Loan: 80% LVR

Total cash deposit required: $120k

Total loan: $480k

Additional costs to settle: $15k (approx)

Once a buyer has obtained conditional approval for financing, 10% will be paid on the land ($30k) and 5% on the construction ($15k).

The balance of funds required for the total cash deposit is $75k.  The loan to settle the land is $195k, and the loan to settle the construction is $285k. Having paid $15k up front, this means the bank pays the remainder of your construction cost.

Understanding the process is key to your success

Whether you are hoping to create that dream home or looking to make a solid investment, purchasing a block and building new is a great option.   As with any purchase, however, understanding the financial process and any potential risk is key to your overall success.

Disclaimer

All information provided in this article is of a general or factual nature only and does not take into account your personal circumstances or objectives. Before making any decisions, you need to consider, with or without the assistance of a licensed adviser or broker, the appropriateness of any material presented in light of your individual needs and circumstances. The information in this article does not constitute a recommendation for any of the products or services provided by SMATS Services (Australia) Pty Ltd and or any of its related entities.

Australia’s property market has clocked up a fourth straight month of home value increases, with Sydney again leading the way, but there may be headwinds lurking.

Australia’s property market recovery has continued ticking along courtesy of a fourth consecutive month of housing value increases.

lack of supply is outweighing the countering influence of rising interest rate and cost of living pressures, with every capital city outside Hobart (-0.3 per cent) recording gains. Regional markets outside Victoria have also trended higher.

Prices in June rose 1.1 per cent, a slight drop on the 1.2 per cent of May.

Sydney was again the frontrunner, lifting another 1.7 per cent in June and taking the cumulative recovery since the January trough to 6.7per cent, according to CoreLogic’s newly released national Home Value Index (HVI) for June.

In dollar terms, Sydney’s median housing values are rising by roughly $4,262 a week.

According to CoreLogic, since finding a floor in February, the national measure of housing values has gained 3.4 per cent, however, the market remains 6.0 per cent below peak levels recorded in April 2022. That is the equivalent of the median dwelling value still being -$45,771 below a peak of $768,777.

CoreLogic’s research director, Tim Lawless, said the number of capital city homes advertised for sale over the four weeks ending 25 June was almost 20 per cent lower than at the same time last year and 26 per cent below the average for this time of the year. Regional listings also trended lower through the month, tracking a massive 33 per cent below the previous five-year average.

June23_IndexResults

Source: Corelogic.

Higher interest rates were, however, slowing the pace of national property price gains.

“A slowdown in the pace of capital gains could be a reflection of a change in sentiment as interest rate expectations revise higher,” Mr Lawless said.

“Higher interest rates and lower sentiment will likely weigh on the number of active home buyers, helping to rebalance the disconnect between demand and supply.”

Deflationary property pressures are building

Also weighing on the market more and more each month is the mortgage cliff.

Helen Avis, Director of Finance at Specialist Mortgage, Australia’s mortgage market is experiencing and confronting a significant shift.

“Starting during the 2020 pandemic, there was a boom in fixed-rate borrowing as lenders slashed their fixed rates to record-low levels and many borrowers took advantage.

“At the peak, almost 40 per cent of outstanding home loans in early 2022 were fixed, which was roughly twice their usual share from prior to 2020.

“As of March 2023, about 25 per cent of fixed-rate loans outstanding in early 2022 had expired.

“By the end of 2023, another 40 per cent will expire; and by the end of 2024, another 20 per cent and presenting what has been dubbed the ‘fixed-rate, or mortgage, cliff’,” Ms Avis said, pointing out that it could play out in stifled property price pressure.

Ms Avis added that it was a good time to refinance.

“There’s a reason refinancing is at record levels and that’s because there’s significant money to be saved by doing so.”

A sign of potential trouble on the horizon is the fact the proportion of loss-making resales that were held for less than two years has trebled since late 2021, while the risk of recession from higher interest rates also weighed heavily.

Another key risk for housing conditions is the potential for a rise in advertised housing stock.

“Low inventory levels have arguably been the most important factor placing upwards pressure on housing prices,” Mr Lawless said.

“A change in the supply dynamic could become evident in spring, when the flow of listings would typically ramp up.

“We could also see more listing flow onto the market if mortgage stress becomes widespread.”

Home values nearing peak levels

Research from PropTrack released this weekend differs from CoreLogic (with a more modest 0.3 per cent national home price jump for the month) but also has prices in the black across the capitals and just 0.1 per cent lower than this time last year.

PropTrack found Sydney home prices had continued their recovery in June after leading the downturn in 2022.

Sydney home prices have now increased for seven straight months, with a 0.6 per cent rise in June. That means home prices are now up 4.5 per cent from their trough in November last year and are just 3 per cent below their February 2022 peak.

June23_Melbourne-Sydney-Home-Price-Growth

Melbourne by comparison had increased 0.2 per cent in June, bringing the city up 0.8 per cent from its low in January this year.

While Melbourne has not seen as sharp a recovery in prices this year as Sydney has, it also did not see as large a decline in 2022. Even so, prices in Melbourne are still 5.2 per cent lower than their peak in March 2022.

Across the capital cities, Perth is the only capital where home values are at record highs, having recovered from the relatively mild 0.9 per cent decline through the downturn, according to CoreLogic.

Adelaide home values are only 0.3 per cent below record highs and likely to reach a new high point in July.

Regional housing values have also trended higher, albeit at a slower pace relative to the capitals.

The combined regionals index also recorded a fourth consecutive month of growth, taking housing values 1.2 per cent higher than the recent low in February.

June23_Rolling3Month-State+Combined

Source: Corelogic.

Mr Lawless said the softer growth trend across regional areas of the country align with recent shifts in demographic factors.

“After regional population growth boomed through the worst of the pandemic, internal migration trends have normalised over the past year, resulting in less housing demand across regional markets.

“Additionally, housing demand from overseas migration is skewed towards the capital cities rather than the regions.”

Rents still climbing amid signs of a slowdown

Rental conditions remain diverse across the nation, but there is growing evidence rental growth is easing.

The national rental index increased a further 0.7 per cent in June, still well above the pre-Covid decade average of 0.2 per cent month-on-month, but a continued deceleration and the smallest monthly rise since January 2023, according to CoreLogic.

The annual growth trend in rents was recorded at 11.5 per cent across the combined capital cities, down from a record high of 11.7 per cent over the 12 months ending April 2023.

Across the combined regional areas of Australia annual rental growth has slowed to 4.9 per cent, following the record high of 12.5 per cent over the year to September 2021.

June23_GrossRentalYields

Source: Corelogic.

Mr Lawless said the slowdown in rental appreciation can be seen in most cities and regional markets to different extents.

Canberra is the only capital to record a fall in rents over the past 12 months, down -2.8 per cent, while declines in Hobart rents over the past two months have dragged the annual trend to just 1.3 per cent. Both these markets have seen a loosening in supply and increase in vacancy rates.

“Although easing, the larger capitals continue to record stronger rental appreciation, especially across unit markets, where overseas migration and insufficient rental supply is continuing to place upwards pressure on rents.

“Rental vacancy rates have generally ticked a little higher over recent months, but remain well below average levels.”

Higher vacancy rates are most evident across regional Australia, rising from 1.3 per cent in February 2022 to 1.5 per cent in June, however, even at 1.5 per cent, the current rate is less than half the decade average of 3.3 per cent. Vacancy rates across the combined capitals have risen from 1.0 per cent earlier this year to 1.1 per cent but are holding well below the decade average of 2.8 per cent.

Some cities haven’t seen any signs of vacancy rates easing. Adelaide is recording the lowest vacancy rate at 0.4 per cent, up slightly from 0.3 per cent in early 2022. Perth’s vacancy rate is holding at 0.7 per cent and Melbourne’s is sitting at just 0.8 per cent.

“Despite such tight vacancy rates, it’s likely the trend in rental appreciation will continue to moderate, simply due to rental affordability pressures forcing a change in rental household formation.

“The early signs of a rebound in the average household size can already be seen in data published by the RBA,” Mr Lawless said.

In relation to the rental crisis, NSW’s Landcom was contacted on several occasions over the past few months for comment on the prospects of land supply increasing in the coming 12 months but failed to respond.

 

Article Q&A

Are property prices going up in Australia?

Australia’s property market recovery has continued ticking along courtesy of a fourth consecutive month of housing value increases. Prices in June rose 1.1 per cent, a slight drop on the 1.2 per cent of May 2023, according to CoreLogic.

Are rents rising in Australia?

Rental conditions remain diverse across the nation, but there is growing evidence rental growth is easing. The national rental index increased a further 0.7 per cent in June, still well above the pre-Covid decade average of 0.2 per cent month-on-month, but a continued deceleration and the smallest monthly rise since January 2023, according to CoreLogic.