Despite some slowdown in the property market, residential mortgage growth remains above pre-pandemic levels, according to the Australian Prudential Regulation Authority (APRA) with their latest statistics revealing that residential mortgage growth has persisted above pre-COVID-19 levels, even amid higher interest rates.
For the quarter ending 31 March 2024, the data indicates a 4.1% increase in outstanding residential mortgage credit compared to the same period the previous year, rising from $2.14 trillion to $2.23 trillion.
Both owner-occupier and investment lending showed growth, with owner-occupier lending up by 4.9% (from $1.42 trillion to $1.49 trillion) and investment lending up by 3.8% (from $642.7 billion to $667 billion).
This rise occurs despite challenges in mortgage affordability and serviceability, so whilst it’s harder to access the same level of borrowing of several years ago, it hasn’t stopped people from getting loans.
In this week’s newsletter, we explore the complications of cost-plus loans.
Lenders generally view cost-plus building contracts with caution as they pose several risks for them. The primary concern is the potential for cost overruns with this uncertainty making it difficult for lenders to determine the total loan amount required, potentially leading to funding shortfalls during the construction process.
Fixed-price contracts on the other hand offer more security and predictability, ensuring that the project’s cost remains within the agreed amount, which aligns better with the structured repayment plans of most loans.
To mitigate risks associated with cost-plus contracts, some lenders may impose stricter lending criteria, require more detailed cost breakdowns, or demand larger contingency funds to cover potential overruns. Borrowers might also face higher interest rates or reduced loan-to-value ratios due to the perceived increased risk.
So what lenders will play ball when is comes to cost-plus loans, and what are the criteria they impose in agreeing to the funding?
Cost-Plus Lenders
Lender | Policy Guidelines |
Westpac |
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Bank of Melbourne |
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CBA |
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Bank Australia |
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Variable
The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR.
1 Year Fixed
The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR. At the end of the three year fixed period, the borrowers interest rate will revert to a standard variable rate for the life of the loan.