Under stress

Property markets are under stress as the froth comes off property prices, lending momentum falters, delinquencies slowly rise from a low base and revenue-hungry lenders push up prices, analysts warn.

"If interest rates were to rise, even a tad, or house prices slip further, we will see the beginning of a great housing crash, assuming incomes remain static in real terms and unemployment stays around current levels," says Martin North, principal of Digital Finance Analytics, which provides data to major lenders.

"But I think it will be more of a slow train wreck, rather than a sharp correction. The truth is, at some point, prices and credit have to come back to long-term trend, and they are both way over at the moment."

For example, if mortgage rates were to increase from the current average of 5.95 per cent to 7 per cent – which is the average for the past 10 years – then the net servicing cost for an average residential property investment in Sydney and Melbourne would increase by about $5000 a year, or about 5 per cent of net household income, according to Moody's Investors Service.

Sensitive to rates

The same increase in interest rates three years ago would have only resulted in an increase of $3500 in net servicing costs due to lower property prices at the time.

The Reserve Bank of Australia is aware the nation's households are highly sensitive to rate increases, says Shane Oliver, head of investment strategy and economics at AMP Capital.


"It's not stupid," he says. "It knows households are now more sensitive to higher rates."

Household debt is rising. But unlike the US before the global financial crisis, the majority of debt is held by wealthier households with the capacity to repay, lending standards have already risen and the average mortgage is two years overpaid, giving many households a big buffer against rate rises. The economy continues to grow and unemployment is falling.

North, however, believes major stress is building in the banking system.

On a knife edge

"My modelling suggest we are on a knife edge," says North. "Sure, there is still demand, including investors and refinance, but affordability is under more stress thanks to tighter underwriting criteria.

"Property buyers have squandered a once-in-a-life time opportunity to reduce debt."

North describes claims that two-thirds of property buyers are ahead in their repayments as "superficial" because the vast majority have made only marginal gains, or are based on offset accounts which use borrowers' savings accounts for interest calculations.

"Many have simply ridden the payments down and used the spare cash for other purposes," he says


About 7 per cent of lenders seeking to refinance their loans are finding it difficult to get comparable terms, he says.

"In other words, there is a cadre of loans out there written in the past two years that are outside current bounds."

Lenders have been increasing rates despite no increase in the cash rate announced by the RBA.

Analysis of lending rates by financial product analyst Canstar reveals that at least 20 lenders have recently increased rates and that others have flagged rises or are expected to make funding announcements over coming weeks.

These rate rises mean the difference between the highest and lowest standard variable rate ranges from about 3.85 per cent to 6.11 per cent, or nearly $300 in monthly repayments on a $1 million mortgage.

Big spread

The 2.26 per cent spread between the higher and lowest standard variable rate is more than the official cash rate, which is 2 per cent, according to Canstar.

Big recent increases include Macquarie Bank upping rates on its Basic Flyer variable owner-occupied loans by 50 basis points to 4.64 per cent and Mortgage House increasing its advantage variable by 45 basis points to 4.64 per cent.


Other banks, such as Bank of Queensland, are set to lift interest rates for housing investor loans by 0.25 per cent, with owner-occupiers also facing increases.

It is unprecedented for a regional bank to reprice loan rates ahead of one of the big four banks, say banking analysts.

Bank profitability is under pressure, regulatory and funding costs are increasing and balance sheets need to bolstered by boosting revenues, either by increasing charges or new business, and cutting costs.

That creates opportunities for sassy property buyers willing to shop around for a better deal, says Justine Davies from Canstar.

Competitive market

"Reducing your home loan interest rate from the current average to, say, 4.35 per cent, could save $263 a month for a 30-year, $1 million loan," says Davies.

"Sometimes you don't even need to switch banks," she says. "Give your current lender a call, mention what type of interest rate you could get elsewhere and ask them what they can do. It's a very competitive market and I'm sure that institutions do not want to lose their high net worth customers."

Twenty per cent equity in a property is the threshold stake for negotiating better rates, according to analysis by Canstar.


Alternatively, some lenders are prepared to take on more risk to generate business.

For example, Adelaide Bank is set to announce that it has reduced its loan-to-value ratio – which is a measure of buyers' equity compared to the lender – from 90 per cent to 80 per cent – in key markets such as Sydney.

Others, such as Firstmac, are making it easier to borrow by reducing their assessment rate, which is a buffer of about 2 per cent added to the current headline variable rate, to 7 per cent. It is also offering 90 per cent loan-to-value ratios.

Extra mortgage payments

Repaying a mortgage is a no-risk strategy, similar to putting money in a bank account. A range of add-on features on offer from most lenders, like draw-down accounts, provide flexibility compared to other forms of saving, such as superannuation contributions, which are locked up until retirement.

Making additional mortgage payments can make a big difference to the life and overall cost of a loan, says MortgageChoice's Jessica Darnborough.

For example, paying an extra $100 a month on a $500,000, 30-year loan with an interest rate of 4 per cent could save $20,000 interest payments and reduce the term by 20 months.

Alternatively, a $5000 lump sum payment could save more than $8500 interest on a $500,000, 30-year loan at 4 per cent.

Offset accounts linked to a home or investment account enable the credit balance of the transaction account to be offset daily against the outstanding loan balance, reducing the interest payable against the loan.

According to government figures, an average employee's net salary of $61,000 placed in an offset account could potentially reduce interest payments by $153,000 and cut seven years off a 30-year, $350,000 home with a 5 per cent interest rate.

Paying down mortgages could create tax issues for investors with a negatively geared portfolio. That means it could be better to first pay off non-deductible debt.