Understanding the Safety of Modern Home Loans: An Australian Perspective
The property sector has seen decades of record-shattering growth, leading many Australians to wonder if it’s too good to be true. The media often paints a chaotic picture, with stories of individuals struggling under their mortgage repayments. However, the reality is more reassuring.
Indeed, the rapid rise in interest rates over the last 18 months has impacted many Australians. Yet, as the industry has matured and scrutiny over home loan providers has increased, Australian Financial Regulators have been more proactive. They’ve been ensuring that the public is protected from high-risk lending practices and unethical behaviours.
For those contemplating a venture into residential property investing, it’s worth noting that the mortgage industry today is arguably the safest it’s ever been.
Australia’s Financial Fortitude
Australia’s financial system stands strong, even when international news highlights bank failures, such as those related to Credit Suisse and Silicon Valley Bank. If you’re tuned into Australian financial news, you’ll notice a trend: discussions about major banks nearing collapse often originate from Europe or the USA. In contrast, Australia’s financial system seems to adeptly sidestep these headline-grabbing catastrophes, which often involve tales of families losing their homes due to corporate mismanagement.
This strength can be attributed in large part to the Australian Prudential Regulatory Authority (APRA) and the Australian Securities and Investments Commission (ASIC). Together, these entities actively manage the risk profiles of financial institutions that millions of Australians trust.
Exactly how safe is safe?
While the occasional negative news story is inevitable, public perception of home loans in Australia has been progressively improving. This improvement is thanks to industry-wide lending reforms ensuring borrowers can realistically afford their mortgage payments. When evaluating your ability to repay, banks now take a particularly cautious approach. For instance, with regulatory guidance from APRA, major banks operate under the assumption that interest rates will be 3% higher than current rates throughout a 30-year loan period.
To understand this: Consider John, a prospective property investor. He recently applied for a $500,000 mortgage to buy an investment property in Sydney. With his current interest rate at 6%, his annual interest would amount to $30,000. However, following APRA’s guidelines, the bank didn’t just rely on this figure. Instead, they evaluated his loan application using an interest rate of 9%, pushing the hypothetical annual interest to $45,000. Under the pre-COVID market conditions – with the lowest interest rates in history – this was a very sensible policy, however in today’s market this policy assumes that the interest rates will rise to above what they were during the peak of the GFC – and stay that way for 30 years. This might seem stringent, but by doing so the bank ensures John can still manage his repayments even if rates rise significantly.
Given the significant growth of the housing market recently, there is more interest than ever in residential property investment. With today’s heightened of financial safeguards, there has never been a better time for prospective investors to take the plunge. If you’ve been exploring the idea of property investment, contact the inSynergy team to begin your journey.