The Royal Commission has sparked fresh discussions in Australia surrounding mortgages, in particular, what it means for homeowners who are currently paying interest only loans and how this will shape the Australian property market in years to come.
In-depth investigations during the commission put newfound pressure on Australian Financial Institutions to significantly improve their lending standards and reduce higher risk lending. Currently, approximately 200,000 Australians have interest-only loans but with the government removing the interest-only benchmark at the start of 2019, this figure is set to change drastically.
In the past, Australian banks offered interest-only mortgages to customers which could be renewed every five years. However, the removal of the benchmark now means that homeowners cannot renew interest-only loans and instead, must begin principal repayments as part of their mortgage repayments. In addition to this, commissioner Kenneth Hayne proposed changes to the mortgage broker industry, whereby the consumer would be required to pay the mortgage broker’s commission, instead of the banks. These proposed changes have the ability to drastically affect the landscape of the mortgage industry by potentially wiping out the whole mortgage broking system, leaving larger financial institutions with the freedom to set the interest rates however high they choose.
But who will be the most affected if these changes are confirmed? Unsurprisingly, it’s fairly widespread and will impact current Australian homeowners as well as those looking to borrow money, even impacting those in the rental market. Homeowners will be paying more for their mortgages. There is approximately $360 billion worth of money wrapped up in interest-only mortgages. In the past, mortgage repayments have been dependant on interest rates, which fluctuate due to mortgage brokers and banks offering competitive rates. But with the expiration of interest-only loans after three-years, homeowners will be required to fork out a lot more for their mortgage repayments, potentially increasing a massive 70%.
An example of this is if you are currently paying $3,000 a month in repayments on interest only, interest and principal would escalate monthly repayments to $4,700. The impact of requiring to pay principal will depend on the financial situation and lifestyle of the homeowner but those with a large property portfolio of interest-only will be hit the hardest. This means having a buoyant property portfolio will only be available to those who are cashed up, which then leads to a flow on effect in the rental industry. Tenants will likely experience an increase in rent. Even with the current market experiencing price declines, the prospect of purchasing a home will now seem even more daunting to prospective buyers due to these changes, driving one-third of Australians to rent instead.
Typically, most interest-only loans are covered by the rental income on an investment property. But with investors now set to be more out of pocket due to principal repayments, it’s only natural that this will affect how tenants are charged, with some landlords opting to charge more in rent in an effort to cover the difference. Less money in the tenant’s pockets means less money to put towards their own house deposit and this creates a vicious cycle. It’s unfortunate that salaries do not increase the same way houses do. The fallout from the commission has led many people to debate how they should react but the truth is, it’s still a bit blurry. Once the new government is in place in May and the new budget is announced, things will start to cement.
But one thing that is certain is it going to be a lot tougher to borrow money, whether it be for investment or as an owner occupier. It’s not that banks don’t want to lend, more the Royal Commission has governed them to be more responsible when it comes to lending. We live in a society where it is very easy to shift the blame to others but at the end of the day, it comes down to each individual’s financial situation and the lifestyle they lead.
Group Managing Director