With the cash rate at a historic 0.1% low, and the big banks following suit with rates as low as 2% there appears to be plenty of opportunity to borrow in the current market. Theo Chambers, Chief Executive Officer of Shore Financial, discusses the mortgage market landscape and the bank’s approach to lending in the current market.
What is the big banks’ approach to lending in the current market?
Big banks’ have come a long way since their risk-averse policies during the 2009 Global Financial Crisis. They were far stricter on mortgage repayments and foreclosed on houses fairly quickly. However, the precedent has now been changed due to the pandemic.
This approach has mostly been established by the Government. They changed many policies to accommodate for the financial disruption people were facing.
In July 2019, APRA adjusted lending policies where the assessment rate, or the rate used for the bank to calculate whether you can afford a loan, is scaled based on the current interest rates. Previously, this was a firm 7.25%. But now, as assessment rates are scaled, it is easier for people on different incomes to get mortgage approval.
Since the introduction of this new policy in 2019, there have been six interest rate cuts, which means six instances where borrowing power was stronger.
This has made home loans are more accessible than they have ever been for most buyers, which sets the foundation for more buyers to compete in the market and drive prices higher.
Banks are really scrutinising over whether lenders received a cash boost during the pandemic, which doesn’t necessarily impact your ability to get loan approval, but the bank will factor this out of your profit and loss statement. However, if banks see that you deferred your home loan repayments, ironically a service that they readily offered, they will be more apprehensive to approve your loan.
How has the property investment market been impacted in the last 12 months?
Mortgage demand from investors has dropped off substantially across Australia. It usually sits at a third of all mortgage approvals but is now at 23% nationally.
Investors are sitting on the fence at the moment. Right now, you would be lucky to find an investment apartment giving you 3% gross rental yield which is not that attractive.
It is likely that investors are also putting their funds into improving their primary residence. Especially as work-from-home has increased in popularity, homeowners are placing more importance on their family home. And this is a great idea as it’s one of the only tax-free wealth generation strategies available in Australia, as there are capital gains exemptions on primary residences.
Although property investment is not as attractive as usual, it is still holding far stronger than other investments such as stocks, which have been volatile throughout last year.
Australians are still keen to invest their money in brick and mortar, something tangible. It’s far safer and more predictable than other investments.
What is happening with first home buyers?
First home buyers are an extremely active segment of the market right now. With assistance from the government, this sector has never been more empowered to take out a home loan.
Shore Financial mostly sees first home buyers who have assistance from the government or even another source, sometimes with a third party acting as a loan guarantor. These people often co-sign as a couple and look for houses over units.
Looking to the future what do you think we can expect?
With such a low cost of funding, due to low interest rates, it will be difficult for the property market not to take off. I’m very optimistic about the growth we will see over the coming years.
Shore Financial equips their clients with the tools to best maximise these capital gains, helping experienced and inexperienced buyers structure their borrowing to optimise returns.
Where possible, it is a good time to invest in property as growth with skyrocket with the impending economic growth Australia will see as buyer confidence returns to the market.
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