New financing restrictions leading to 'mortgage prisoners'
Thousands of potential Sydney upsizing vendors are not going anywhere this spring, being trapped in their current home with their current financing.
All due to tighter home loan lending restrictions that leaves them unable to negotiate the required funds to upsize.
Indeed many of these home owners would not be able to get the same existing loan amount if they tried, and not just because of weak income growth.
Stricter lending rules are a good thing, especially at a time of historically low interest rates, but they will continue to be a major brake on buyer potential to bid for property.
This means fewer offers from finance approved buyers which means the galloping price growth seen during the five year boom just won't happen.
The size of the imminent spring price falls will depend, in part, on just whether downsizing vendors seek to sell at a discount to recent values.
I think sales activity levels will remain subdued.
With very high household debt, these stricter lending criteria were introduced for good reason by the regulatory authorities over the past four years.
The unexpected royal commission into finance has extenuated the tightening by lenders.
Gone is the one size fits all approach which saw inflated amounts being lent to desirous home buyers.
Lenders now look thoroughly at the applicant's income and expenses - everything from utility bills, childcare, Netflix subscriptions, education, insurance, telephone and internet, groceries and medical, health and disability requirements. Even beauty treatments.
The regulator also now expects lenders to discount uncertain or variable income by at least 20%, including any rental income for investment properties.
Mozo finance commentator Steve Jovcevski suggests stay put home owners are also struggling to refinance their way into better mortgages.
He nominated a couple with one dependent and a dual income of $120,000 who purchased a home in 2013, borrowing $800,000.
Their $4,295 monthly repayments leaves them $3,680 to manage their other expenses.
Fast forward five years, the couple now has a $129,000 combined salary and they've had another child.
They're still paying the same amount, have $734,600 left to pay off, and would like to refinance to closer to the 3.8% on offer rather than staying with their current 5% rate.
When they secured their 2013 loan, the bank used a poverty line index to estimate their costs ($3,276 per month) with a buffer of 1.5% to ensure the couple could meet their repayments if rates increase.
The bank now defines their actual expenses as being $4000 per month, and applies a 2% buffer.
Under the new criteria the refinancing couple can only borrow $680,000.
These home owners have been dubbed 'mortgage prisoners', unable to move to a more competitive mortgage deal, even if they’ve met every repayment, because they would not pass new affordability tests.
The banks would like to continue their loan growth, but for the penalties being handed out for breaches against their responsible lending obligations.
The best poised spring buyers are likely stumping up a near 20% deposit.
And have done a through spring clean of their finances, including getting rid of excess credit cards, which are a negative on their credit ranking.
Find a good mortgage broker too.
This article first appeared in The Daily Telegraph.