Mortgage Loans, Home Loans, Bad Credit Home Loans

Borrowers looking for home loans in excess of 80% should think again. Not only does borrowing beyond 80% bring in a significant cost of mortgage insurance, adding anywhere from 2% – 3% to the loan costs, such loans also subject the borrowers to higher risk of negative property equity.

In recent times with many properties experiencing a drop in value, the greatest losses are borne by borrowers with home loans up to 95% of their purchase price. Such borrowers are now finding that they have no equity in their home as it is worth less today than the amount of their home loans.

Certainly no deposit home loans are very much confined to the pages of history given the recent Australian experience.

After a spate of property price falls over the past 12 month, many home owners are at risk of negative equity – ie. a situation where their home loans are higher than the value of their homes.

The drop in home values has raised concerns that some existing home loans are now higher than the property’s value. This will be especially a concern for borrowers taking out home loans in excess of 85% over the past 24 months.

Financial research company Canstar says there are now more than 90 loan products that allow people to borrow 95 per cent or more of a property’s purchase price.

It is these high loan-to-value home loans that are at greatest risk of having negative equity.

“This will affect borrower ability to refinance their home loans, as lenders will not take on that level of risk,” Watson says.

Home owners who simply wish to sell and upgrade their homes may also find that why they can now buy a new home cheaper than previously, their own property is also likely to sell for less or worse still, fail to sell.

Resi Mortgage chief executive Lisa Montgomery says most lenders “wound back” high loan-to-value mortgages, such as 95 per cent loans, during the global financial crisis but they had reappeared during the past year or so.

“Areas of oversupply and with negative growth are of serious concern to investors right now,” she says.

Interest rate analyst RateCity says negative equity was a “real concern” for borrowers and investors with properties located in suburbs where real estate values have plummeted.

Some people now owe to their bank more than their home is worth.

While most home owners and investors do expect that the Australian property market will turn around – it is unclear when this is likely to happen.

Over a third of potential first home buyers who are currently tenants don’t believe they’ll be able to save a home loan deposit anytime soon. Whereas almost half believe they’ll have to find a better job before they may be able to afford to buy their first home.

A recent survey conducted by ING Direct has revealed that only 21% of prospective first homebuyers believe they will be able to save a deposit within the next three years. Of those who are renting or do not already own a home, 36% indicated there was “no way” they would be able to save a deposit in this timeframe. Forty-one per cent said they would have to find a better job or even take on a second job in order to save a deposit.

Potential first home buyers living in capital cities face even higher property prices and can find it very difficult to meet their existing costs of living including payments for credit cards, car loans, rental etc.

Obviously the higher your income is the better your chance of saving for a deposit and qualifying for a home loan.

A recent Loan Market survey also highlighted the difficulties faced by prospective buyers trying to save for a deposit. A survey of the company’s brokers indicated an overwhelming 77% had seen first home buyer deals scuttled most often due to the lack of a suitable deposit. First home buyers with credit history issues or those looking for a low doc home loan, may need to save as much as 20% of the purchase price to qualify for a home loan.

Despite growing economic problems in Europe and greater difficulty for lenders to access funding overseas, the home loan in Australia war is likely to continue in the short term at least.

It will be more and more difficult for banks to maintain the expected levels of profitability while meeting the expectations of borrowers.

Profit margins will decline as home loans – the lifeblood of the Australian banking industry – become less profitable, according to a recent report from Deloitte.

In its 2012 report on the state of the mortgage industry, released yesterday, Deloitte said consumers may benefit in the short term.

But it warns they may ultimately pay a heavy price as the number of players in the home loan game will drop significantly.

“Price wars will likely continue in the short term,” Deloitte national banking leader Rick Porter said.

“While such price competition may be a good outcome for borrowers in the short term, it does make it more difficult for competitors to emerge and potentially stifles innovation and other benefits that come with a broad base of competition.”

Australia’s total value of home loans is $1.2 trillion. But it is only growing at 6 per cent a year – the lowest growth rate in two decades, the report said.

As Australian population continues to age, home owners will look to downsize their homes.

Teamed with the growing trend for households to consolidate debts, pay down loans, and save money, banks will find it “challenging” to grow their mortgage books more quickly without poaching customers from rivals, he said.

Deloitte senior banking partner Graham Mott, also an author of the report, said banks would start feeling the squeeze on margins in the coming year. The bulk of the home loan business will come from refinance activity.

The solution was for lenders to seek revenue streams from insurance operations and other businesses.

Over the next two years, net interest margins – a key measure of a bank’s ability to profit from lending – will slide from 2.2 percentage points towards 2 percentage points.

Banks will struggle to meet the expectations of borrowers by offering the cheapest home loan deals while still remaining profitable.

Genworth has come out with a new mortgage insurance product that will help first home buyers make a home purchase sooner.

The ‘Graduate Package’, which includes a host of new features, is expected to make home ownership easier for younger Australians.

Growing property prices, the removal of the extended First Home Owners Grant and the more stringent home loan qualification criteria has made it more difficult for young people to purchase their first home.

Young people with strong income and good career prospects often have a difficulty saving the required deposit as property prices keep climbing.

The Genworth Graduate Package allows recent graduates who have entered a professional career to purchase property earlier in their career and in the location of their choice rather than forcing people to purchase where they do not wish to live due to borrowing restrictions.

To be eligible for the package, borrowers must hold a university degree, must be employed within an occupation related to the degree qualification, graduated within the last five years and have a minimum salary of $50,000. Such people are already seen as premium borrowers by the banks and generally do qualify for the home loans they apply.

As part of the package, Genworth will remove the high density restrictions currently in place and offer a maximum LVR of 95 per cent for high density postcodes. The insurer would like to stimulate first home buyers and this is a great way to do it. University graduates have the potential to earn a lot of money down the track and home loan qualification should be taking this into account.

Given the negative economic sentiment stemming from Europe, both  JPMorgan and Westpac are predicting a spate of interest rate cuts to support Australian economy.

JPMorgan believe that RBA will reduce rates once more in December, February and March, taking the cash rate to 3.75 per cent, from the 4.5 per cent the Reserve Bank cut it to this month.

“It now looks likely that the RBA’s quarter point rate cut on Melbourne Cup Day will not be an isolated affair,” said JPMorgan chief economist Stephen Walters.

Other Australian banks have not predicted so much so soon but also concede that given the European Debt crisis rates will have to come down making home loans personal loans and car loans cheaper for all Australians.

Damien McColough, head of Australian dollar rates strategy at Westpac said one-year ahead interest rate expectations had recently dropped to levels not seen since the financial crisis in early 2009 and implies a fear of an emergency rate cut delivered by the RBA in response to a Europe’s problem.

Mr Walters said there was a growing risk of dysfunction on financial markets could drive up costs for Australia’s bank creating a drag on local economic activity and forcing the RBA to cut rates lower.

NAB is slowly increasing its home loan market share, coming closer to the share held by its main rivals – CBA and Westpac.

Over the past year, NAB was the only one of the big four to experience an increase in its home loan market share.

The lender managed to lift its holding 1.5 per cent, taking it to 16.5 per cent overall, marginally ahead of ANZ with 15.6 per cent.

The Commonwealth Bank of Australia and Westpac Group both experienced a drop in their market share of 1.4 and 0.5 per cent respectively.

CBA now holds a 23.6 per cent, while the Westpac Group holds a 26.8 per cent share of the market.

NAB also saw the largest increase in its individual loan book in September 2011, with $1.4 billion worth of home loans added in September 2011. Undoubtedly having the lowest variable interest rate as well as the most significant cash injection into marketing has helped NAB in their success.

Westpac Group added $1 billion worth of owner-occupied home loans, while ANZ and CBA added $704 million and $186 million worth of home loans respectively.

NAB management has expressed confidence about the bank’s future saying that the bank can comfortable handle an increase in market share

According to an RBA official, the central bank is pretty happy with the levels of home loan rates for the moment.

Speaking at a securitisation conference, RBA assistant governor Guy Debelle was asked what the central bank’s position was on greater competition in the mortgage market.

While RBA is always happy to have healthy competition on the mortgage market, the bank is happy with the pricing of home loans for the moment.

The central bank cut its official cash rate by 25 basis points to 4.5 per cent earlier this month, leading the major commercial banks to reduce their home loan rates by a similar amount.

Financial markets are wagering the RBA will cut rates to 4.25 per cent at its next meeting in December, though the bank itself has offered no guidance on the likelihood of such a move.

However based on the bank feedback it does not look like home loans will become any cheaper in December, with RBA likely to sit on the current cash rate into the new year.

Borrowers received some good news this month through an interest rate reduction for the first time in almost three years.

It was nice to see that most lenders had passed on the rate reduction in full and almost immediately – making variable rate home loans cheaper for the first time in quite a while.

Lenders are still very keen to entice new borrowers to join them by refinancing their home loans, car loans, personal loans and any other debts.

Some lenders are also offering borrowers incentives such as a free holiday or a cash back amount in order to win their business.

All this in addition to the abolition of exit fees, which came into effect from July 1.

Competition among lenders is enough to get people to at least look at their existing home loans with a view to refinancing.

The lowest amongst fixed-rate home loans is the three years home loan from Suncorp at 5.99 per cent, according to Infochoice. The lowest one-year fixed rate is from Newcastle Permanent at 5.94 per cent. The lowest variable rate is from UBank at 6.39 per cent. This includes a loyalty discount of 0.2 per cent for the first 1000 customers who are refinancing.

Low doc home loans have changed with the introduction of the National Credit Code, many brokers are still treating low doc home loan inquiries as they did some years ago.

Following the release of ASIC’s examination of low-doc brokers, it seems that a number of brokers are still seeing low doc home loans as asset loans – this is no longer allowed.

Mortgage Brokers are expected by ASIC to treat every home loan applications as if it is full doc, only the type of documentation collected to verify income details will vary.

ASIC has placed a series of requirements on low doc loans some of which are difficult to quantify, due to this brokers must make sure that they remain true to the intention behind the NCCP legislation.

Brokers are rightfully uncertain about low-doc broking due to ASIC inability to give rulings. Having a new regime in place where everyone is worried about being the first party in court to test out an aspect of it doesn’t make for a very cohesive workplace.

ASIC has expectations of low-doc brokers will go beyond the requirements imposed by lenders. This is a strange requirement as brokers are only selling a product created by lenders. This expectation is actually scaring many brokers away from processing low doc home loans. Perhaps that was the intention.