Refinancing trouble looms for borrowers with small deposits: RateCity
Borrowers who bought their homes with small deposits may struggle to refinance their mortgages in 2012 due to falling property values, RateCity.com.au has warned.
The problem would apply to both variable-rate and fixed-rate mortgage holders looking to refinance into a new fixed or variable-rate loan but not to those that have signed a contract where a fixed-term loan automatically rolls over into a variable-rate mortgage from the same lender.
Mortgagees on high loan-to-value (LVR) ratios in Brisbane, Melbourne and Hobart will be most at risk of not being able to refinance, as their mortgage debt may now be greater than the value of their homes.
House prices fell by 6.8% in Brisbane in 2011, by 6.1% in Melbourne and by 5.9% in Hobart leading a 3.6% fall nationally, according to figures compiled by RP Data-Rismark.
A 3.6% decline in 2011 would translate into a $400,000 home falling to a value of $385,600 over the course of the year.
Changes in capital city property values year-on-year
City | Median dwelling price | Year-on-year change |
Sydney | $485,000 | -0.3% |
$462,500 | -6.1% | |
Brisbane | $420,000 | -6.8% |
Adelaide | $370,000 | -4.4% |
Perth | $450,000 | -4.3% |
Darwin | $450,000 | -2.3% |
Canberra | $488,000 | -2.2% |
Hobart | $328,000 | -5.9% |
Capitals | $450,000 | -3.6% |
Source: RP Data
“Imagine buying a $400,000 property with a 5% deposit,” says RateCity.com.au chief executive Damian Smith.
“On day one, you’d assume you had $20,000 of equity value in the property. But if the property’s value declines by 10%, then it’s worth just $360,000 – and you have no equity at all.
“If you try to refinance in those circumstances, you will find yourself owing more than the property is worth – a mortgage of $380,000 as against property value of just $360,000.”
Besides creating problems for buyers with high LVRs, Smith says a downturn in refinancing this year due to uncertain property values would be a serious blow to Australia’s lenders.
“The industry relies on refinancing of existing mortgages for a big proportion of their business. Refinancing was the main driver of home loan volume in 2011, as in fact it has been over the past decade.
“According to RateCity research, 51% of all home loans last year were from refinanced mortgages – this is the highest proportion of refinanced loans on record for at least the past 20 years,” Smith says.
“If property values drop further and it discourages borrowers from refinancing, the mortgage market could be in for a very slow year.
“But on the flip side, first home buyers and borrowers with more than 20% equity in their home are in the best position to find a great value home loan as lenders will be desperate to find new business.”
To make a more informed decision before you refinance, download Property Observer’s free eBook: 12 tips for refinancing your mortgage – how to find the best home loan in 2012