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Scramble for housing gets riskier - investors taking advantage of super low mortgage rates; borrowing at higher loan-to-value ratios and taking out riskier interest-only loans
Topic Started: 9 Oct 2014, 10:10 PM (399 Views)
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Scramble for housing gets riskier

04 Oct 2014
By Larry Schlesinger

Investors are taking advantage of super low mortgage rates to get a foothold in the current property boom.

Greater numbers, though, are moving up the risk curve to get into the market, borrowing at higher loan-to-value ratios and taking out riskier interest-only loans on the premise that house prices will continue to rise.

One in two home loans in NSW over September were for investment purposes, according to Australia’s biggest mortgage broker, Australian Finance Group. It was a record month, with investors also accounting for more than a third of home loans in Victoria, South Australia and Queensland.

In Sydney, the dominance of investors (50 per cent) and the withdrawal of ­first-home buyers (less than 4 per cent of all AFG home loans in September) is most pronounced.

Westpac economist Matthew Hassan says rising property prices, falling fixed ­mortgage rates and gross rental yields comfortably above both term deposit rates and dividend yields have created a mix “conducive for strong investor activity”, particularly in Sydney.

Mark Hewitt, chief operating officer at AFG, says in Sydney and Melbourne there is a flight among investors towards property over shares. “In the last two years, competition for home loans is the strongest it has ever been.”

But, he argues, credit standards have not slipped. “Lenders remain quite choosy,” he says. “Most investors take out a standard principal-and-interest loan on their primary residence, but want to keep payments on their investment loan at a minimum.”

Hence the rise of interest-only loans, where only the interest is paid off each month, leaving the principal untouched as investors punt on price gains to build equity.

However, if prices fall investors could be left with a bigger loan than the value of their property, leaving them in a dreaded “negative equity” position.

“Competition is strong for investment home loans,” says finder.com.au’s Michelle Hutchison. “Investors can improve their returns with a good value home loan deal; the difference between a $300,000 investment home loan at the average variable rate of 5.31 per cent compared to the lowest rate of 4.54 per cent, could save them $141 a month” – $50,000 over 30 years.

However, finder.com.au also recorded a 73 per cent rise in borrowers taking out interest-only home loans in September 2014 compared with the same month last year.

Among the banks, Westpac is the nation’s biggest lender to investors, according to APRA figures, ahead of the Commonwealth Bank and its big four rivals. Macquarie Bank is a rising force, targeting investors borrowing against their self-managed super funds.

Read more: http://www.afr.com/p/personal_finance/smart_money/scramble_for_housing_gets_riskier_NP4Xg0Y4i06mjzlubeDhIP
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