Mortgage brokers have warned that Australian first home buyers (FHBs) are over-extending themselves, borrowing to the max to get into the housing market, which will leave them exposed if interest rates rise and house prices fall.
Mortgage broker Chris Foster-Ramsay said “a lot of our pre-approved customers” are “wanting to borrow as much as they can”:
“[They’re saying] ‘We are at the maximum at the moment, we are still looking, we expect there to be some plateau [in prices] but our concern is what if rates go up?’”.
“There are customers there who are wanting to borrow as much as they can sensibly in order to enter the market now, so they can buy where they want to buy.”
It is a sentiment shared by Equilibria Finance managing director Anthony Landahl:
“We are still seeing buyers, particularly home buyers as distinct from investors, looking to get an appetite to borrow the maximum amount they are able to, to give them that ability to get into the market”…
Axton Finance principal mortgage broker Clinton Waters also noted that FHBs typically expect their incomes to rise over time, therefore they are more inclined to take on more risk:
“First-home buyers, they just get so emotionally involved, they go, ‘we have got to stretch ourselves, we have got to get it’”…
“What these younger borrowers don’t always think about is what a single-income household looks like.”
The Australian Prudential Regulatory Authority’s (APRA) latest mortgage exposure data shows that around one-quarter of mortgage borrowers in the December 2021 quarter originated a mortgage at a debt-to-income (DTI) ratio of six or above. This was up from around 15% of mortgage borrowers pre-pandemic:
Presumably lots of these borrowers were FHBs with FOMO extending themselves to get into the market after watching prices soar over the pandemic.
The federal budget’s Home Guarantee Scheme, which was more than doubled to 50,000 places, will enable even more FHBs to purchase a home with only a 5% deposit.
Given nearly every economist is tipping interest rates to rise sharply and for house prices to fall, there is a clear and present danger that many FHBs will plunge into negative equity at the same time as they face spiraling mortgage repayments.
Enticing FHB patsies into the market with 5% deposits is a bad idea at the best of times. It is outright diabolical policy when mortgage rates are about to ratchet higher and house prices are facing significant falls.
