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Income requirement increasing

December 2, 2023

It seems like last week I opened with reference to the fact that it was now spring, and here we are at summer already. So much seems to have happened over the past three months which might explain why time seems to be flying by quicker than ever.

News out during the week has revealed that mortgage brokers wrote 71.5 per cent (seven out of 10) of all new residential home loans during the September 2023 quarter, marking the second-highest mortgage broker market share figure the industry has recorded to date. So whilst mortgage market activity is a bit soft, brokers continue to be the overwhelming path of choice for new borrowers.

In this week’s newsletter, we take a look at how the amount of money you need to be earning to service a home loan has gone up over the past year.

Income Needs

According to the ANZ CoreLogic Housing Affordability Report, the income necessary to manage new mortgages on average dwelling values has risen on a yearly basis.

As of September 2023, prospective home buyers are now required to allocate 46.2% of their income to service a new loan on the average dwelling, marking an increase from 40.3% in the same period last year.

This rise contrasts with the low of 29% in March 2020, during the pandemic’s response when the official cash rate stood at 0.1%.

Despite this decline in mortgage serviceability, the percentage of income required is just below the peak of 47.3% recorded in March 2008.

The report suggests that reduced borrowing capacity may exacerbate unequal access to homeownership, particularly as rising interest rates create a challenging market for low-income/wealth households.

Deposits Shrinking

The Australian Prudential and Regulation Authority (APRA) notes a decrease in the portion of new loans secured with a 20% or less deposit, from 35.9% in March 2022 to 29.3% in June 2023, a year after interest rates began to rise.

Why Is This Happening?

In just three years, the time it takes the average first home buyer to save a house deposit has leapt by almost 3.5 years in New South Wales, more than two years in Victoria and nearly a year-and-a-half in Queensland.

The time needed to save a full 20% deposit has extended to 10 years nationally.

This being the case, there has been a surge in the number of people entering the market with a deposit of less than the ‘ideal’ 20%.

Affordability in regional Australia has also diminished, as purchase values increased more than in capital city markets since the pandemic’s onset, challenging the notion of these areas as an affordable alternative.

Any changes in interest rates from last week are highlighted in orange.

Note – Increases announced by lenders as a result of RBA decisions normally take 1-2 weeks to come into affect.

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.

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