 When you apply for a mortgage, the lender uses a series of criteria to assess how likely you’d be to repay the loan. As part of this process, the lender also considers whether you’d be able to continue making your repayments if interest rates were to rise.
Generally, lenders will apply a buffer of at least 3.00 percentage points – so if you applied for a loan with an interest rate of 6.50%, this would mean calculating whether you’d be able to make repayments at 9.50%. This ‘mortgage serviceability buffer’, as it’s known, is mandated by APRA, Australia’s banking regulator. Partly, it’s designed to prevent lenders from issuing risky loans; because if a large number of borrowers defaulted on their loans, that would undermine the banking system. And, partly, it’s designed to protect borrowers from taking on loans they might not be able to afford. The serviceability buffer can make it harder for borrowers to qualify for loans, but is ultimately designed to be in their best interests.  Property investors have enjoyed a golden run over the past five years, during which the national median rent increased 39.7%. However, in July, rents increased just 0.1%, which was the slowest growth since 2020, according to CoreLogic. At the same time, annual rental growth has been trending down over the past few months. Between February and July, rental growth fell from 9.7% to 8.0% in the combined capitals, although it rose from 5.4% to 7.1% in the combined regions. The big cities appear to be close to their rental affordability limit, while the regions, which have had less rental growth, might have more capacity to absorb higher rents.  Despite the slowdown of the national rental market, CoreLogic economist Kaitlyn Ezzy said rents were likely to keep increasing.
“Low supply will likely continue to put upward pressure on rents, albeit at a slower pace,” she said. “With dwelling approvals and commencements at historic lows, providing sufficient new housing will not be a quick fix and remains a genuine challenge for policymakers, the property industry and, of course, tenants.” In other words, while rents are likely to keep rising, tenants are likely to get some relief and investors shouldn’t budget for the double-digit-percentage increases of previous years.  Home loan volumes have significantly increased over the past year, especially among investors. Investors committed to $10.67 billion of mortgages in May, according to the latest data from the Australian Bureau of Statistics. That was 29.5% higher than the year before. At the same time, owner-occupier borrowing activity rose 12.2%, to $18.13 billion. Investors were responsible for 37.1% of the home loans that were issued in May. Despite the surge, that's only slightly higher than the long-term average (in records dating back to 2002) of 35.9%.  By way of comparison, investors' share of home loan activity bottomed out at 22.4% in 2021 and peaked at 45.9% in 2015, while owner-occupiers’ share reached a low of 54.1% in 2015 and a high of 77.6% in 2021.
If you’re thinking about applying for a home loan, here are three important tips to make yourself more creditworthy in the eyes of lenders:
 Record property prices are proving to be good news for vendors, with 94.3% of all vendors in the March quarter selling their home for more than they'd originally paid, according to CoreLogic. That was the fourth consecutive quarterly increase and the highest share since 2010.
However, the share of vendors who made a gross profit varied significantly from capital city to city, reflecting different market performance. Another significant finding was that house owners were more likely to record a profit than unit owners, by a share of 97.1% to 89.0%. Also, there was a clear link between the amount of time someone had owned a home and the size of their profit. Vendors made a median profit of $82,000 with a hold period of up to two years, $275,000 for up to 10 years, $435,000 for up to 20 years and $780,000 for up to 30 years.  The federal government has allocated another 50,000 places across Australia to its Home Guarantee Scheme (HGS) for the 2024-25 financial year.
That includes 35,000 places for the First Home Guarantee and 10,000 for the Regional First Home Buyer Guarantee. Under the first program, the government supports eligible first home buyers to purchase a property with a 5% deposit, without having to pay lender's mortgage insurance (LMI). The second program is identical, but applies to regional applicants purchasing regional properties. The HGS also includes 5,000 places for the Family Home Guarantee, through which the government helps eligible single parents and single legal guardians to purchase a property with a 2% deposit, without paying LMI. For all three schemes, applicants must be owner-occupiers. Income caps apply ($125,000 for single applicants, $200,000 for joint applicants), as do property price caps (which vary from state to state). The HGS has strict conditions and is not available through all lenders. If you’re unsure whether you’re eligible or how the scheme works, reach out and I’ll be happy to help.  With property prices at record levels, the size of the average mortgage has also hit new highs, making it more important than ever that you shop around for the right loan. Australia’s median property price reached a record $794,000 in June, up 8.0% year on year, according to CoreLogic. Meanwhile, the size of the average owner-occupied loan reached a record $626,055 at the end of May (the most recent month for which we have data), up 7.1% year on year, according to the Australian Bureau of Statistics. Just as interest rates can vary significantly from lender to lender, so can your borrowing power, depending on your financial profile, the type of property you’re planning to buy and the location of the property. Sometimes, one institution might be willing to lend you tens of thousands – or even hundreds of thousands – of dollars more than another institution.  Trying to source all this information yourself would be very time-consuming. But brokers have an intimate understanding of the credit policies of many different lenders. That’s why, if you get a home loan through a broker, they can recommend a lender that is suitable for someone with your profile and scenario.
 If you're one of the many Australians who've purchased a property through a self-managed superannuation fund (SMSF), the Australian Taxation Office (ATO) has provided valuable guidance about how to file your annual tax return.
The ATO said that if you want your SMSF annual return to be processed without delay, you should make sure:
 The Australian property market is growing briskly right now and has grown significantly since the pandemic. But the city-by-city performance has been more varied. Over the year to May, the national median price rose 8.3%, according to CoreLogic. But at a city level, growth ranged from a staggering 22.0% increase in Perth to a 0.1% decrease in Hobart. Meanwhile, growth since March 2020 has ranged from a high of 62.6% in Perth to a low of 11.2% in Melbourne.  CoreLogic's head of research, Eliza Owen, attributed the contrasting results to diverse market conditions.
“The highest-performing markets have generally come off a low base, with housing conditions and demographic trends relatively weak over the years preceding the pandemic,” she said. “Differences in capital growth trends are marked by the varied supply-demand balances of each city, and in turn migration, affordability factors and dwelling completions influence that supply and demand dynamic.” Ms Owen said annual growth had started to slow across the combined capital cities. “This could mean a slowdown in growth across Brisbane, Perth and Adelaide is on the horizon, and could see the range of growth eventually narrow across the capital cities,” she added.  While it’s often said you need a 20% deposit to qualify for a home loan, a significant number of borrowers are securing mortgages with smaller deposits, according to the latest data from APRA, the banking regulator. In the March 2024 quarter, 31.0% of new home loans (by value) had deposits of less than 20%, while 6.2% of new loans had deposits of less than 10%. Generally, you will need to pay lender’s mortgage insurance (LMI) if you purchase a property with a deposit of less than 15-20%. However, some lenders give LMI exemptions to certain professionals, such as doctors, dentists, physiotherapists, lawyers and accountants.  While more than three in 10 borrowers are taking out loans with deposits under 20%, these figures are relatively low by historical standards. Back in December 2020, for example, 41.7% of new loans had deposits of less than 20%, while 11.3% had deposits of less than 10%.
This illustrates how banks have tightened their lending standards, to ensure borrowers don’t take on an excessive amount of debt. Yet it’s still possible to buy a property with a small deposit, provided your financial circumstances allow it and you structure your loan application correctly.  The federal government has unveiled a series of reforms to the banking sector, which aim to help consumers access lower home loan rates and higher savings accounts rates.
As part of the reforms, Treasury will investigate how behavioural economics could be used in the banking sector to encourage consumers to switch to cheaper home loans and banking products. Also, lenders will be required to make it easier for customers to refinance their mortgage, by ensuring they have direct and easy access to the forms needed to switch. Treasurer Jim Chalmers said these changes would “help bank customers get a better deal, including through more choice, lower prices and better services”. For consumers, that could mean:
 Since late 2019, homebuilding costs have increased by nearly 40%, according to a speech by Reserve Bank assistant governor Sarah Hunter, while general inflation (referred to as headline CPI in the graph) has been less than 20%. So why have residential construction costs grown twice as fast? Ms Hunter said one reason is that building materials and labour have “risen sharply” since the pandemic. Another reason is that higher interest rates have made it more expensive for developers to fund their projects. High building costs have partly contributed to “an imbalance between new supply of housing and growth in demand,” according to Ms Hunter. She said there were several ways in which these imbalances may be resolved, including a slowdown in the growth in building costs and an increase in average household size. “But it will not be a quick fix. Demand pressure, and so upward pressure on rents and prices, will remain until new supply comes online,” she said.  Here are three things to consider if you’re thinking about building a home in 2024:
 The Australian Taxation Office (ATO) has warned property investors it will pay close attention to their reported income and deductions this tax time, with official data showing that about 90% of investors get their tax returns wrong.
ATO assistant commissioner Rob Thomson said general repairs and maintenance on your rental property can be claimed as an immediate deduction – but expenses that are capital in nature (like immediate repairs on a property you just bought or improvements some time after purchase) are not deductible as repairs or maintenance. “We often see landlords making mistakes when it comes to repairs and maintenance deductions on rental properties, so we’re keeping a close eye on this. This year, we’re particularly focused on claims that may have been inflated to offset increases in rental income to get a greater tax benefit,” he said. “You can claim an immediate deduction for general repairs like replacing damaged carpet or a broken window. But if you rip out an old kitchen and put in a new and improved one, this is a capital improvement and is only deductible over time as capital works.”  Are you a first home buyer or single parent who wants help getting a property? If so, you’ll be interested to learn that the federal government’s Home Guarantee Scheme (HGS) has now supported more than 150,000 buyers since its inception in January 2020. Eligibility is limited. There are property price caps, which vary from state to state. Income caps also apply – $125,000 for individuals and a combined $200,000 for joint applicants. The HGS consists of three programs:
 Of the 150,000 buyers who have used the HGS, 51% have been women and 55% have been under the age of 30, according to Housing Australia, which administers the scheme.
Contact me if you’re thinking about accessing the HGS. I'll let you know if you're able to qualify for the scheme and manage your loan application if you are.  Back in March 2020, at the start of the pandemic, 13.38% of new borrowers were choosing fixed-rate loans and 86.62% were choosing variable. But in March 2024, a staggering low of only 1.40% of new loans were fixed, compared to 98.60% variable, according to the Australian Bureau of Statistics. The reason so many borrowers are going variable right now is because of a widespread belief that interest rates are at or near their peak, which means variable borrowers would benefit from any future rate cuts. Conversely, in July 2021, when interest rates were at record-low levels, 46.02% loans were fixed, while only 53.98% were variable. If you’re wondering whether fixed or variable is right for you, here are the main pros and cons of each option:    Property buyers are being forced to compete hard in many markets around Australia, so how can you improve your chances of securing your dream home?
Here are five tips to beat out other buyers: Have a home loan pre-approval in place. This will make you look more attractive in the eyes of real estate agents, because it will position you as a serious buyer who can move quickly if their client accepts your bid. Build good relationships with agents. Real estate agents work for vendors, not buyers, so they prioritise their clients' interests. But if you can establish a good working relationship with agents – even while keeping some of your cards up your sleeve – they might favour your offer over those of other buyers. Be realistic with your offers. If you're buying via private treaty, avoid the temptation to begin with a lowball bid, otherwise agents will take you less seriously than the buyers who are making serious offers. Make an offer before the auction. If you're buying via auction, get ahead of the competition by making an offer before the auction. If your price matches what the agent expects to get at auction, they might tell their vendor to play it safe and accept your offer. Be flexible around settlement. Tell the agent you're willing to accept different settlement conditions (assuming that’s possible). This might include a short or long settlement, or a scenario in which you let the vendor rent the property for some time before you move in.  Despite the rise in inflation and interest rates over the past two years, “nearly all borrowers continue to service their debts on schedule”, according to the latest Financial Stability Review from the Reserve Bank of Australia (RBA). “Households with lower incomes, including many renters, have felt these budget pressures acutely,” the RBA said. “Most mortgagors have experienced an increase in their minimum scheduled payments of 30–60% since the first increase in the cash rate in May 2022. Sharply higher housing costs (for borrowers and renters) and broad-based cost-of-living pressures have weighed heavily on the budgets of many households and contributed to very weak consumer sentiment.”  Nevertheless, borrowers have found a way to get by.
“While housing and personal loan arrears have increased since late 2022, they remain below their pre-pandemic peak,” the RBA said. “At the same time, a small but increasing share of borrowers have requested and received temporary hardship arrangements from their lenders, which has contributed to arrears rates remaining a little lower than would have otherwise been the case.”  Australia has hundreds of different property markets, which are often at different points in their cycle, so it's common for there to be many markets where prices are increasing and many where they're decreasing. Right now, though, the vast majority are in growth mode. An analysis of 4,625 house and unit markets around the country by CoreLogic found that 88.4% experienced median price increases over the year to February 2024. That compared to 52.9% in July 2023 and 39.1% in February 2023.  CoreLogic economist Kaytlin Ezzy said the reason prices had risen in most markets over the past year was due to an ongoing imbalance between housing supply and demand.
“Despite three rate hikes, worsening affordability, and the rising cost of living, the increasingly entrenched undersupply in housing stock, and above-average demand thanks to strong net migration, has helped push values higher,” she said.  The value of new mortgage borrowing is continuing to increase, as more buyers enter the market and property prices – and therefore loan sizes – keep rising. Borrowers committed to $26.40 billion of home loans in February, according to the most recent data from the Australian Bureau of Statistics. That was 1.5% higher than the previous month and 13.3% higher than the previous year. The owner-occupier share was $16.87 billion, which was up 1.6% on the month before and 9.1% on the year before. The investor share was $9.53 billion, which represented a 1.2% month-on-month increase and 21.5% year-on-year increase.  But while Australians are taking out more new loans, they’re refinancing fewer existing ones.
Borrowers refinanced $16.55 billion of loans in February, which was 3.0% higher than the previous month but 17.9% lower than the previous year.  Australians purchased 5.3% more new homes in February than the month before, according to the Housing Industry Association (HIA). However, HIA chief economist Tim Reardon said this increase was off a “very low” base. Based on the number of new homes being approved for construction and purchased, he forecast there would be a decade-low amount of homebuilding activity in 2024, despite the pent-up demand for housing.  Nevertheless, banks are still keen to lend to Australians who want to build a new home or renovate an existing one. To finance your project, you’ll need a construction loan (rather than a regular home loan). Here’s how construction loans work:
 First home buyers are able to enter the market a little faster than a year ago, new research has found. At a national level in February, it took 4 years 9 months for a first home buyer to save a 20% deposit on an entry-level house, compared to 4 years 11 months the year before. For an entry-level unit, the time to save a deposit was 3 years 5 months – one month faster than the year before.  Domain classified an entry-level property as one ranked at the 25th price percentile (with the 1st percentile being the cheapest home and the 100th being the dearest). Domain's calculations assumed that first home buyers were a couple aged between 25-34, earning an average salary for someone their age.
The reason that first home buyers are now able to save a deposit more quickly is not because property prices have fallen over the past year – because they've actually increased. Rather, it's because earnings power (through a combination of higher wages and higher savings account interest rates) has grown faster than property prices.  New research by the e61 Institute and PropTrack has revealed there's been a significant increase in relative stamp duty costs in recent decades. Back in the early 1980s, buyers in Sydney, Melbourne, Brisbane and Adelaide needed to do about one month's work to cover the cost of stamp duty, assuming they purchased a median-priced property and earned the average post-tax income. But as of 2023, it takes about six months’ work in Sydney and Melbourne, five in Adelaide and four in Brisbane. Last year, almost all buyers faced a stamp duty rate equivalent to at least 3% of the sale price, while, in the early 1990s, almost all buyers paid less than this amount.  PropTrack senior economist Angus Moore said the two reasons stamp duty had become relatively more expensive were because property prices had grown faster than incomes and state governments had allowed ‘bracket creep’ to occur with stamp duty tax brackets.
“Bracket creep happens, firstly, because the price brackets have been updated only infrequently and, secondly, because home prices have grown, often substantially, since the brackets were last set,” he said. “That means more properties have moved up the brackets and are now paying higher rates of stamp duty.”  The latest tranche of home loans data from the banking regulator, APRA, has revealed three interesting shifts in the mortgage market over the past year. First, there's been a meaningful rise in investor activity during that time. During the December 2022 quarter, 30.2% of new loans were for investment purposes; but in the December 2023 quarter, the share increased to 32.4%. There's been a corresponding decline in owner-occupier activity, which fell from 67.7% to 65.6%.  Second, there's been a sharp decline in borrowing with a debt-to-income of 6 or greater (e.g. someone on a $100,000 salary borrowing $600,000 or more). This fell from a 11.0% share of new loans in December 2022 to only 5.6% in December 2023.
Finally, the share of borrowing with a loan-to-value ratio of 80% or higher has actually increased, from 30.6% of new loans in December 2022 to 31.4% in December 2023. Whether you’re an owner-occupier or investor, I can advise you about your borrowing power and help you get a great home loan.  Rents have increased in most capital cities over the past year and are likely to continue rising throughout 2024, according to a leading property data expert. Between the December quarters of 2022 and 2023, the median rent on realestate.com.au rose 11.5%. That included double-digit gains in Perth (20.0%), Melbourne (18.3%), Sydney (16.7%) and Adelaide (12.5%), as well as increases in Brisbane (9.1%) and Darwin (1.7%). By contrast, rents stagnated in Canberra (0.0%) and declined in Hobart (-4.8%). During the same period, the vacancy rate fell from 1.3% to just 1.1%. With rents growing and vacancies falling, this is potentially a good time to be a property investor.  PropTrack's director of economic research, Cameron Kusher, forecast that the “tough rental market conditions” would continue.
“We expect supply to remain tight and demand to stay strong, likely pushing rents higher,” he said. “Lending to investors trended higher over 2023, indicating that investors are returning to the housing market. However, many investors continued to sell, resulting in a relatively small pool of rental properties being available for the large number of people seeking accommodation. The rapid increase in Australia’s population exacerbated rental market challenges, as most people migrating to Australia become renters.”  A significant number of borrowers are unclear about lender’s mortgage insurance (LMI), according to a recent survey of mortgage brokers by LMI provider Helia.
The survey found that 85% of broker respondents think LMI can benefit buyers who want to get into the market earlier, while 70% believe it can also help renters who want to transition into ownership. However, 50% of respondents feel borrowers generally don't properly understand LMI. LMI is a form of insurance that protects the lender in case the borrower defaults on the mortgage and the lender can't recover the loan from selling the home. The premium varies, depending on the size, type and location of the property. Lenders generally insist borrowers take out LMI if they want to buy a property with less than a 20% deposit – although, for some professions, such as doctors and lawyers, it’s possible to buy a property with a smaller deposit without paying LMI. The upside to using LMI is you can enter the market with a smaller deposit; the downside is the cost. I’d be happy to discuss both the potential benefits and costs, so you can make an informed decision about whether LMI is right for your personal situation.  There's been a significant increase in first home buyer activity over the past year, based on the latest data from the Australian Bureau of Statistics. There were a total of 9,491 owner-occupier first home buyer mortgages issued across Australia in December 2023, which was 12.9% higher than the year before. First home buyer activity rose in six of the eight states and territories, with Queensland and Tasmania being the exceptions to the rule.  While it can be challenging to buy your first home, this data shows it’s not impossible. Here are four tips to get on the property ladder:
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AuthorRachael Bland – Founder & CEO Archives
February 2024
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