Three reasons why home ownership affordability is set to improve
By Don Crellin, Managing Director.
Australians wanting to buy, build or refinance a home are set to benefit from a combination of government, regulator and bank changes – expected to roll out in the coming months. Here are three upcoming changes that could support your home ownership goals.
1. Interest rates have decreased
On 4 June 2019, the Reserve Bank of Australia (RBA) reduced its cash rate for the first time in almost three years. Many leading economists are forecasting two 0.25% decreases this year – one in June and one in August. Some are even predicting a third cut in November.
Of course, just because the RBA changes rates, doesn’t necessarily mean all banks will follow – or reduce your mortgage loan rate by the same amount. But as funding costs have eased in recent times, we expect most lenders will pass on at least part of the 0.25% decrease to new borrowers.
Australian interest rates are already at historically low levels, so further decreases are taking us into new territory. For your home loan, this could mean several things:
- Affordability has never been better, meaning you may now be able to afford a home you couldn’t before
- Establish good habits: for new home owners it’s a great time to establish ‘good habits’ in managing the new home loan commitment while rates are at an extremely low level
- Bank the savings: if your current rate does go down and you can afford to, it’s a great opportunity to increase your repayments above the minimum required to build up your equity (the difference between the home’s value and the amount you owe), which will provide a buffer for you at some stage should you need it. Plus, it will significantly reduce the amount of interest you end up paying the bank over the term of the loan.
Read more about interest rate cuts and how to make the most of them.
2. Changes to increase your borrowing capacity
When the eastern states’ property markets were rallying, rules were introduced around home loan accessibility and how much banks could lend customers. These rules included the capping of interest-only home loans and investment home loans; and placing high benchmarks on assessing a borrower’s capacity.
But with interest rates so low and some property markets weakening, these rules aren’t reflective of current conditions. So the Australian Prudential Regulation Authority (APRA) is suggesting changes which could effectively mean you can borrow more.
They have already removed the interest-only and investment lending curbs. And now they are reviewing the policy relating to borrowing capacity.
At the moment, a lender has to assess each customer’s borrowing capacity. This means the lender will test to see if the customer could service their loan at a rate of 7.25% (APRA’s assessment rate is 7% but most banks assess at 7.25%). If the customer can’t afford the loan at that rate, the amount they can borrow will be reduced. But this rate of 7.25% isn’t reflective of today’s market. So APRA is currently consulting with banks about adjusting this criteria and the consultation period will end 18 June.
We expect they will require banks to assess borrowing capacity based upon an interest rate 2.5% above the actual home loan rate (rather than a flat 7.25%). With interest rates in the mid to high 3%s, this would see borrowing capacity based on a rate of around 6.25%, a 1% difference to where we sit today.
While this is still a very prudent approach, the result of this change will increase the maximum loan amount available for prospective purchasers.
3. Government support for first home buyers
The Coalition government made an election promise to support first home buyers. While details are still light, their proposal is to support up to 10,000 first home buyers who’ve saved at least a 5% deposit. The government is suggesting they’ll guarantee 15% of the purchase price, therefore eliminating the need for mortgage insurance, which could save the buyer up to $10,000.
At this stage, the incentive would be open to singles on an income up to $125,000 and couples on a combined income, up to $200,000. There will be property purchase caps depending upon regions, however this detail is yet to be determined.
Irrespective of the details that are yet to be determined, the good news from this announcement is that the Government is serious about initiatives to help first home buyers overcome the challenges of jumping on the property ladder.
At Resolve Finance, our goal is to be your finance partner for life and we’re committed to keeping you informed about changes which affect your finances and ability to buy, build or invest in property. Stay tuned for more updates as they come or click here to speak to one of our mortgage brokers to find out what these changes could mean to you.