The fear of missing out as housing market rocket is tempting some buyers to take a plunge into the property market with only a small deposit in a bid to take advantage of record-low interest rates.
However, this could leave them with little spare financial capacity to meet mortgage repayments if rates rise again, they lose their jobs, or have their hours markedly reduced.
Mortgage lenders have been keen to increase their share of the market following its temporary cooling off last year.
More than three-quarters of lenders listed on the Canstar database now have mortgages that allow lending to those with deposits of just 5 per cent.
However, snapping up a mortgage with a high Loan to Valuation Ratio (LVR) can have a serious adverse impact on your finances in the long run.
Canstar estimates someone buying a $800,000 a property with a 5 per cent deposit would pay almost $70,000 more in interest over 30 years, compared to the same person putting down a more regular deposit of 20 per cent.
Then there is the extra expense of required lenders’ mortgage insurance, which protects lenders but is paid by any borrower with a deposit of less than 20 per cent. This insurance can run into tens of thousands of dollars.
For a purchase of $800,000 by an owner-occupier who is not a first-time buyer with 5 per cent deposit, Genworth’s lenders’ mortgage insurance calculator estimates it would cost almost $35,500.
With a 15 per cent deposit, the lenders’ mortgage insurance is estimated to be $9,600. The lender usually adds this cost to the loan, resulting in even more interest payable.
Steve Mickenbecker, Canstar’s group executive financial services, says the “ongoing burden and strain on household budgets of borrowing with a very low deposit can be extreme and may be felt for the next 30 years”.
Figures from RateCity also show a doubling in the number of lenders offering “cashbacks” to buyers looking to refinance their mortgages who have sizeable equity in their properties, compared to a year ago.
Sally Tindall, research director at RateCity, says a combination of record-low interest rates and escalating property prices are pushing people to take on more debt.
Property researcher CoreLogic’s figures show that capital city house prices are continuing to march higher. Sydney prices are up 6.4 per cent since the start of the year and Melbourne prices by 4.8 per cent.
The researcher says preliminary auction clearance rates for Sydney last weekend were an astounding 89 per cent, compared with just 40 per cent for the same weekend last year. Melbourne’s clearance rate was almost 84 per cent, up from 38 per cent.
However, the federal government is offering some relief to first-home buyers that are struggling to get a foot on the property ladder.
Under its First Home Buyer Deposit Scheme, first timers can put down a deposit of just 5 per cent and avoid having to pay the added impost of lenders’ mortgage insurance.
Since the start of the scheme a little more than a year ago, 20,000 places will have been offered by the middle of this year for the purchase of new and existing homes. A further 10,000 places are to be added from July 1.
Some financial experts, including Shane Oliver, chief economist at AMP Capital, are expecting the Reserve Bank of Australia to use “macro-prudential controls” to restrict mortgage lending if standards become too lax. He says measures could be introduced later this year that include a return of the imposition on lenders to limit growth in loans to property investors, as well as restrictions on high LVRs and debt-to-income ratios.
Andrew Wilson, consultant economist at Archistar, expects capital city house price growth to remain strong, but could moderate through the second half of the year as affordability declines.
Article Source: www.brisbanetimes.com.au
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