FHB loans aren’t riskier: RBA

An analysis by Reserve Bank of Australia analyst Maia Alfonzetti has explored how much first home buyer (FHB) loans contribute to financial stability and macro-economic risks.

FHB loans sharply rose over 2020, supported by government programs such as the First Home Loan Deposit Scheme, as well as low interest rates.

Over 2021, the value of new FHB lending declined a little, as house prices surged – but the segment occupied around 20 per cent of total housing commitments.

FHB loans appear riskier than other owner-occupiers, at least during the first five years of the loan, the RBA report noted.

They typically borrow a higher share of the value of the property than other buyers, as accumulating the deposit is their main barrier to entering the housing market.

Almost 30 per cent of FHBs borrowed at a loan-to-valuation ratio (LVR) at 90 or more in January 2022, compared with 7 per cent of other owner-occupiers and 4 per cent of investors.

They have less of a buffer against housing price falls than other owner-occupiers and would be more likely to have their property price fall below the outstanding value of their loan (i.e. be in negative equity) if there were a decline in house prices.

“However, given the strong housing price growth over recent years, FHB loans were no more likely than other owner-occupier loans to be in negative equity in early 2022,” the RBA research note said.

“The share of new lending to FHBs at high LVRs has also declined over the past year.”

Despite appearing riskier across some metrics, data from the HILDA survey suggested FHBs were no more likely to experience financial stress than other owner-occupiers over the duration of the loan.

“In the loan origination year, FHBs were half as likely as other owner-occupiers to report making a late mortgage payment,” the RBA report stated.

“The share of borrowers making late mortgage payments broadly increases in the years following the loan being taken out, as borrowers face a higher cumulative chance of shocks that may cause financial difficulty. But the differences between FHBs and other owner-occupiers with loans of the same age are small and not statistically significant.”

FHBs and other owner-occupiers with loans of the same age were equally likely to report experiencing three or more financial stress events unrelated to paying their mortgage.

Data analysis confirmed that being an FHB had no statistically significant impact on financial stress. Instead, significant predictors of financial stress include having lower cash buffers, lower levels of income, a larger household size, poorer health or more negative perceptions of job security.

Risky loans

As house prices have soared in excess of income growth, the deposit constraint has become more binding on loan sizes of FHBs, than in the past.

As such, the RBA noted, recent FHBs have been less likely than other new borrowers to have high debt-to-income (DTI) ratios.

In January, FHBS were found to be equally likely as other owner-occupiers to borrow at DTI ratios of six up to eight at origination.

Investors were much more likely to have high DTI ratios, as they typically have more than one mortgage and tax incentives discouraging them from paying down debt ahead of schedule.

“Some repeat buyers take out bridging loans to finance the purchase of their subsequent property; almost 30 per cent of lending to non-FHBs at DTI ratios of eight or more in January 2022 was bridging finance,” the RBA report said.

“Lenders may also be less willing to extend very high DTI loans to FHBs as they have less credit history than repeat borrowers.”

However the share of new lending to FHBs at DTI ratios of six or above increased a little in 2021. The RBA also examined the net income surplus (NIS) – the amount of income remaining each month after covering basic living expenses and mortgage payments.

FHBs less likely to report income drop above 20%

Lenders calculate the NIS for all new borrowers as part of their serviceability assessment, factoring in future rate increases and potential falls in income.

Estimates from household survey data suggested FHBs who took out a loan in the three years to 2017/18 typically had a lower NIS than other owner-occupiers and investors.

They had less capacity to absorb negative shocks to their income or expenses than other borrowers, and could be more likely to face repayment difficulties or cut back their consumption during a shock.

Household survey data also showed FHBs with loans up to three years old had lower liquidity buffers than other borrowers with loans of the same age.

“FHBs also tend to have lower buffers of liquid assets that could be used to shield their consumption during a negative income or expenses shock in the first few years of the loan,” the RBA research note read.

“However, FHBs are also generally at an earlier stage of their career, and so have historically experienced stronger income growth and have been no more likely to experience income loss than other borrowers.”

FHBs were more likely to experience faster income growth than other owner-occupiers on average for a couple of years before and after taking out their loan.

They were more likely than other owner-occupiers of the same age to report job insecurity and were more likely to receive promotion over the duration of the loan, especially in the year after it was originated.

While they were more vulnerable to negative income shock in the early years of their loans, they were no more likely to experience losing their job or seeing a drop in income.

“FHBs have been less likely than other owner-occupiers to report income that is more than 20 per cent below the income they received in the previous year,” the RBA noted.

Data from the HILDA survey also showed FHBs paid down debt at a similar pace to other owner-occupiers over the first five years of the loan life.

[Related: Mortgage affordability sees steepest annual decline in 12 years]