The latest home loans data from the Australian Bureau of Statistics has revealed three key trends.
1. Borrowing is rising strongly. The total value of home loan commitments in June reached $29.19 billion, which was 1.3% higher than the previous month and 19.1% higher than the previous year.
2. Investor activity is incredibly strong right now. While the volume of owner-occupied loans rose 13.2% year-on-year to $18.17 billion, investment loans jumped 30.2% to $11.02 billion.
3. While refinancing activity remains quite high, it’s well below the record levels of mid-2023. Borrowers refinanced $15.79 billion of loans in June, which was 20.9% lower than the year before.
Rents expected to keep growing, but at a slower pace
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.
Why banks assess your home loan re-payment capacity at higher interest rates
When you apply for a mortgage, the lender uses a series of criteria to assess how your capacity to repay the loan. As part of this process, the lender also considers whether you would be able to continue making your repayments if interest rates were to rise.
Generally, lenders will apply a buffer of at least 3.00% – so if you applied for a loan with an interest rate of 6.50%, this would mean calculating whether you would 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.
How to build your dream house
One of the great things about constructing your own home is that it can be tailored to your specifications. If you’re interested in building rather than buying your dream home, here is a process you may follow:
• Speak to your broker about your borrowing capacity
• Seek your desired location
• Source a reputable builder
• Obtain building permits and approvals
• Build the home
With a traditional home loan, you receive the money in one lump sum; but with a construction loan, you receive the money in five stages throughout the project. You pay interest-only on the portion of the funds you’ve received to date, rather than the total loan limit; and at the end of the build, your loan reverts to a traditional principal-and-interest mortgage.
It’s worth noting that the rate of annual growth in house-building costs increased from 3.9% in September 2023 to 4.3% in June 2024, according to the Australian Bureau of Statistics.
Given that costs will likely continue to rise, the sooner you build, the cheaper it could be in the long term. If this is something you’re thinking about doing, you should explore your options soon.
If you are buying, re-financing or have any questions, contact me on the below information.
TAG Finance and Loans
Sal Cinque | CEO
03 9886 0800 | loans@tagfinancial.com.au
Disclaimer: The information contained on this page is general in nature. Professional advice should be sought before acting on any aspect on this page. TAG Finance and Loans Pty Ltd ABN 25 609 906 863 Credit Representative Number 483873 National Mortgage Brokers Pty Ltd ABN 88 093 874 376 Australian Credit License 391209.