Only a month after the end of the government’s First Home Owners Boost, and cracks are appearing with both borrowers and lenders caught up in the frenzy.
The Sunday Telegraph today reports that almost half of the 135,000 first home buyers coax into the First Home Buyers Boost are struggling to meet their mortgage repayments with many in arrears. In a survey of 26,000 of the borrowers, Fujitsu Consulting found that 45% were either in mortgage stress or severe mortgage stress.
The problem of mortgage stress effects more than just First Home Buyers. The Mortgage Finance Association of Australia/Bankwest Survey of 850 people across Australia indicates approximately 16 per cent of owners struggled to replay home loans in November, up from 11.7 per cent in May.
But it is not only home owners which are struggling. Both the Westpac and Commonwealth Banks took on First Home Buyers last year like a cat in a mouse plague and are now licking their wounds.
The Australian Prudential Regulation Authority (APRA) requires that banks to take out lenders’ mortgage insurance (LMI) on loans with a Loan Value Ratio (LVR) over 80% and this insurance is passed onto the buyer. The majority of First Home Buyers had little in the way of deposits, outside of the grant and the boost.
As Westpac has two mortgage insurance subsidiaries, Westpac LMI Limited and St George Insurance Australia Limited, APRU requires the bank to put aside the premiums, it can’t adsorb it into its normal operations. BusinessDaily believes Westpac has had to increase the paid up capital of its mortgage insurance subsidiaries by more than $330 million.
As a result, the Westpac Bank has lowered its loan to value ratios on standard variable mortgages from 92 to 87%, requiring borrowers to either have much more substantial deposits, or borrow less with the deposit they have. Low doc loans have also been reduced to 80%. If the rest of the Australian mortgage market follows suit, this could easily spell the end for Australia’s overinflated housing bubble.
» Aussie’s struggle to foot mortgage bill – The Sunday Telegraph, 31st January 2010.
» More Australians Struggle With Mortgage Payments, MFAA Says – Bloomberg, 29th January 2010.
» Insurance blowout weighs on Westpac – Herald Sun, January 27th 2010.