Sky-high prices push potential home buyers to borrow to the max
Some first-home buyers are stretching their borrowing to the limit to try to get into the pricey property market despite looming interest rate rises, mortgage brokers warn.
Other buyers, especially owners looking to upgrade, are starting to take a more conservative approach to their debt levels as they plan for borrowing costs to rise.
The large loans being taken out highlight the challenge of buying a home after house prices have soared by double digits during the pandemic, and fallen by only a fraction in the past few months.
Major economists expect the Reserve Bank to lift the cash rate in June for the first time in more than a decade, pushing up the cost of a mortgage, although the impact will be delayed for borrowers already on fixed-rate products.
When prices were booming last year, potential buyers who missed out at auction were going back to the drawing board and asking if they could borrow more than they initially felt comfortable with. Some even overspent at auction and hoped their bank would lend them the difference later, while brokers started pre-approving clients for their maximum in the first place to avoid having to do the paperwork twice.
In the face of sky-high prices, some are still hoping to borrow as much as possible.
Mortgage broker Chris Foster-Ramsay said borrowing to the maximum was still common, although pro-risk customers are more likely to be stretching themselves than risk-averse ones.
“[They’re saying] ‘We are at the maximum at the moment, we are still looking, we expect there to be some plateau [in prices] but our concern is what if rates go up?’
“There are customers there who are wanting to borrow as much as they can sensibly in order to enter the market now, so they can buy where they want to buy.”
Equilibria Finance managing director Anthony Landahl is still seeing home buyers looking to borrow the maximum amount they can, in order to purchase in a market where prices are still high despite a recent slowdown.
“We are still seeing buyers, particularly home buyers as distinct from investors, looking to get an appetite to borrow the maximum amount they are able to, to give them that ability to get into the market,” he said.
“There has been a net gain in price and people are still recalibrating where they can buy and what they can afford … Affordability is still an issue.”
For existing mortgage holders, many have been taking advantage of rock-bottom rates over the past couple of years to make extra repayments and get ahead on their loans, he said, while new borrowers are being assessed to make sure they can meet repayments once rates rise.
These buffers are in focus for the Reserve Bank, which has noted that some homeowners have managed to get ahead on their repayments, and emphasised the importance of banks maintaining lending standards for new borrowers. A recent change from the bank regulator forces lenders to check if buyers could meet their repayments if interest rates rose 3 percentage points.
Axton Finance principal mortgage broker Clinton Waters is seeing second- and third-home buyers become more conservative about not taking on too much debt before rates go up.
Their income-earning capacity is getting towards its peak and they may have children to account for too, he said.
But first-home buyers often expect their incomes will rise over time, and think more of taking a risk.
“First-home buyers, they just get so emotionally involved, they go, ‘we have got to stretch ourselves, we have got to get it’,” he said.
“What these younger borrowers don’t always think about is what a single-income household looks like.”
Mortgage Broker Sydney principal Michael Brown said almost all first-home buyers are trying to borrow as much as they are able, but there was a small shift for upgraders as the market eased.
“We are able to go at a slightly more normal or sustainable pace in our home-loan buying process in terms of preparing applications,” he said.
“Because there is a little more time they are not under quite so much pressure and they make better decisions now, so they don’t necessarily go for the last dollar.”
But first-time buyers generally do not have the luxury of only borrowing, for example, $800,000 from a capacity of $1.2 million, he said.
Even some clients who had self-imposed limitations spent almost a year looking for a home and eventually realised they needed to borrow more to meet the market, he said, although this kind of decision was becoming less common.
“They come to understand there are definitely going to be interest rate rises and people need to cater for not just a small increase but potentially a significant increase,” he said.