This week we witnessed the beginnings of a rear-guard action to rescue Australia’s housing market, with the Australian Prudential Regulatory Authority (APRA) flagging that it would soon lower the mortgage repayment buffer.
This buffer, which dictates the interest rate that prospective borrowers must be assessed on, is currently set at 3.0%. APRA this week suggested it would soon be lowered in a bid to increase borrowing capacity and support house prices.
Now mortgage lenders have sought to increase borrowing capacity even further through the introduction of 35- and 40-year mortgages.
Specifically, NAB subsidiary Ubank said last week that it would extend a 35-year mortgage previously only offered to new buyers to those looking to refinance.
Australian Mutual Bank, Pepper Money and RACQ Bank are also now offering 40-year mortgages.
Extending a 25-year loan to 40 years saves $481 in monthly repayments on a $500,000 mortgage. Therefore, it dramatically increases borrowing capacity.
However, would also cost $336,018 more in interest over the loan term, meaning more people would enter retirement with housing debts.
Canstar’s Steve Mickenbecker said extending mortgage terms would “supercharge” monthly savings for borrowers.
“This is an enticing prospect for borrowers caught out by the rapid increase in rates [as] extending the loan term drives down the monthly repayment”, he said.
“But [it comes] at a cost of still having a loan at an older age than originally anticipated [and] the borrower will, of course, be paying a considerably higher amount of interest”.
Leaving aside the fact that these actions by APRA and mortgage lenders work directly against the Reserve Bank’s efforts to constrain demand and inflation via rate hikes. And that they would likely drive interest rates higher than they otherwise would be.
They are another blatant attempt to give an adrenalin shot to housing demand to usher a new price boom.
Allowing people to borrow more for housing will do what it always does: drive debt levels higher and result in more expensive housing over the long-term.
The last 20 years is living proof of how the story will end.
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