An image illustrating the effect the coronavirus has on the economy.

How the Coronavirus Reshaped Home Loans in Australia

The coronavirus pandemic has resulted in a significant shift in the economic landscape. As a result, a number of initiatives from the Australian government have been introduced. These Specific schemes were created to help ensure people and businesses get the support they require, especially in spending.

Before the outbreak, the financial conditions of the housing market were quite accommodating to potential buyers. However, because of the restrictions, monetary policies and regulations have sharply changed directions as a response to the ongoing crisis. Many plans are now more focused on deferring a conservative lending environment, which helps ensure high liquidity for the lenders.

The cash rate has lowered to 0.25%, and it is possible to remain low for the years to come. These rate cuts frequently cause inflation on house prices, but it does not look like it’s going to happen due to the current market conditions.

There is still no sign of distress in the housing market. Many potential homeowners continue their search for the home of their dreams despite the pandemic. However, it is interesting to note that home loan approvals have drastically reduced.

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Home Loan Numbers Revealed

According to the Australian Bureau of Statistics (ABS), home loan approvals have dropped to $16.4 billion, which is an 11.6% reduction in May this year. This dramatic decrease is the largest ever in 18 years.

The plummeting numbers are not mainly because of the lenders getting stricter with the approvals. It is attributed to the lower demand for owner-occupier loans. However, it does not mean Australians are no longer looking to get a loan. Because of the lockdown and other restrictions, the figures are less appealing for lenders and those in the housing market.

COVID-19 and Mortgage Lenders

The pandemic presents a significant challenge to mortgage markets, not just in Australia but globally, and it is perhaps the most difficult period since the 2008 financial crisis. Lenders need to adopt a strategic action to survive. While some impacts will only remain for the short-term, others can have lasting, seismic effects that will take years to recover from.

For example, the National Australia Bank (NAB) has announced that the organisation will stop about 100 projects to focus on addressing the ever-increasing customer enquiries. NAB has also reported that only essential projects will be continued, including those that are related to digital access, credit provisions, and relief for employees.

The government has enacted certain programs that would help lenders and small businesses. However, everyone should still brace themselves for a reality that may be more difficult than imagined.

But aside from the government, mortgage lenders have become wiser. Their actions depend on their current status, but they mostly pay attention to business risks. The goal is to manage and stabilise these risks and position themselves towards recovery.

Some efforts that allow the achievement of the mentioned goal are:

  • Adapting and improving experiences of the customers
  • Providing temporary relief programs
  • Taking care of cash flow
  • Understanding the possible risks and giving a solution before they get worse

For example, many lenders have offered a six-month mortgage payment deferral with more than 375,000 by early April this year. It is about six per cent of the total outstanding mortgages.

Non-bank lenders are especially vulnerable in the country because they have become the fastest-growing segment in the industry. But thankfully, Australia has an initial economic response to the crisis where the government has funds dedicated to these lenders.

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Home Loan Refinancing On the Rise

Loan commitments may have decreased, but refinancing is going in the opposite direction. The numbers have increased to $21.7 billion, which is at least 29% higher than the previous figure. ABS chief economist, Bruce Hockman, attributed such a change with people’s response to reduced interest rates. Offers for refinancing have become attractive as well.

Unlike owner-occupier loans, refinancing these existing loans with another bank or lender looks like a much better option.

Before the coronavirus, the Australian economy was up 0.3% before the end of 2019 and 2.2% throughout the previous year. Unfortunately, with the pandemic, the Treasury announced the drastic fall of Gross Domestic Product (GDP) by over 10%. Additionally, the unemployment rate was already 6.2% in April with the Treasury forecasting over 1.4 million Australians losing their jobs.

Because of the circumstances, many lenders were quite apprehensive with the ability of the borrowers to meet their obligations. Usually, borrowing agreements state that failing to meet the repayment requirements constitutes a default, which invokes the right of the lender to exercise ways to recover the outstanding debt. In such a situation, it means the lender will have to take the collateral as the repayment for the loan.

However, it is not easy to execute during the lockdown. As a result, both lenders and borrowers could benefit from refinancing.

When does it make sense to refinance mortgage loans though? If you are a borrower, refinancing for you means that you apply for a new loan to pay off an existing one. During the COVID-19 pandemic, there are numerous offers available, including incredibly low rates. It is why refinancing is a great idea, primarily when you have found a lender or a mortgage product with a much lower interest rate.

You may want to refinance your loan if you agree with the following statements:

  • You want to obtain a lower interest rate offer from your current or another lender.
  • You wish to convert your loan from an adjustable-rate to a fixed-rate loan (or vice versa).
  • You want to shorten the term of your mortgage.
  • You want to tap into your home equity and raise funds in case of a financial emergency, which could happen anytime.
  • You will use the loan for a large purchase.

Most people, however, refinance their mortgage to consolidate their debt. It should be noted that refinancing can cost about five per cent of the loan’s principal. This percentage can vary from one lender to the next. Also, it requires a title search, additional fees, and an appraisal, among others.

If you find a much lower interest rate, it can be enough reason for you to refinance your loan. After all, you can save a lot of money. Interest rates make up a massive portion of your repayment, which is why it is useful to grab the opportunity when it’s available.

Also, refinancing increases the rate of your home equity while decreasing the total amount of your monthly payments.

Let’s have an example:

  • You have a 30-year mortgage loan, which is at a fixed interest rate of 5.5%.
  • The house is valued at $300,000.
  • Your monthly payments will be around $1,703.37.
  • The total interest you will pay is $313,212.12 throughout the life of the loan, which is for 30 years.

However, if you switch to another lender or offer with a 4.1% interest rate, your monthly payments will become $1,449.60. The total interest is $221,854.24.

It’s Time to Reconsider Your Debt Structure

Refinancing is an excellent option to reduce the term of your current loan. Interest rates have fallen, which provides potential homeowners with the opportunity to purchase a house at a much lower price. If you already have an existing mortgage, one way for you to save is to refinance it with another that has a more attractive rate. If it is not possible, look at the duration of the loan. The shorter the loan term, the less interest you will have to pay.

You can save more if you opt for a 15-year term compared to a 30-year mortgage. Yes, it does look more expensive, but your interest is higher with the latter. Let’s say that for the $300,000 loan, which equals $2,234 in monthly repayment for 15 years with the 4.1% interest rate. For the 30-year loan term, you will only have to pay $1,449.60 per month. As you can see, the payments are much lower. However, you are actually getting a much better deal with the 15-year term, considering that the total interest you are paying is only $102,143 compared to $221,854.

Refinancing may also be an option for you if you plan to switch from a fixed rate to a variable rate or vice versa. It is crucial that you base this decision on your current and future financial situation.

Think about it carefully:

  • Fixed rates provide you with certainty, which means you know exactly how much you should allocate for the repayments for this period or the succeeding ones.
  • The problem with a fixed interest rate is that you may not reap the benefits of rate cuts, which are quite common during this pandemic.
  • On the other hand, periodic adjustments or adjustable rates often begin much lower than a fixed-rate loan.
  • A huge downside is that the prices can increase.

Currently, there are no indications of the rates going up. According to some experts, the low rate on mortgage loans will stay for at least the end of the year. For now, it may be a good idea to switch to variable rate loans.

The pandemic has caused a steady decrease in rates and refinancing is a smart choice, especially if you wish to reduce your current interest rate.

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    ** Comparison rates are based on a loan of $150,000 over a term of 25 years. WARNING this comparison rate applies only to the example given. Different amounts and terms will result in different comparison rates. Costs such as economic cost and cost savings such as fee waivers are not included in the comparison rate but may influence the cost of the loan.

    * Please note not all loan types are suitable for all applicants and the above rate is for general advertising purposes only. Please check the applicable rates are still valid with a Quantum Finance broker. Your full financial situation will need to be reviewed prior to acceptance of any offer or product