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Mortgage stress more than doubles for FHBs

A new report has found that the number of first home buyers who experience mortgage stress has climbed drastically over the last six months.

Released yesterday, the 11th edition of the Genworth Homebuyer Confidence Index (HCI) found that after increasing by 3.8 per cent to 102.1 in March 2015, FHB confidence fell to 98.4 in September 2015.

This was driven by the increased proportion of FHBs who both experienced mortgage stress (21 per cent, up from 9.0 per cent in March 2015) and expect mortgage stress (14 per cent, up from 8.0 per cent in March 2015).

The report found that higher cost of living was the most common reason for FHBs experiencing (22 per cent) and expecting (33 per cent) mortgage stress.

However, a higher than average proportion of FHBs also experienced difficulty meeting their mortgage repayments despite two cash rate cuts in February and May this year because they “fixed their interest rate when rates were higher” (16 per cent compared to 6.0 per cent of all homeowners).

FHB loan sizes have been climbing, with Australian Bureau of Statistics (ABS) data showing the average FHB loan size has grown by 18 per cent since August 2012, reaching $341,200 in July 2015,” the report said.

“This result suggests some FHBs may have overcommitted themselves financially, as FHBs are more than three times as likely as average to expect mortgage stress because they have borrowed too much (14 per cent compared to 4.0 per cent of all homeowners).”

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Despite this, the proportion of FHBs who are comfortable with high LVR loans increased slightly between March and September 2015, from 20 per cent to 21 per cent.

“The second cash rate cut in May 2015, which would have improved the affordability of mortgage repayments, may have led to more FHBs believing they would be comfortable with larger loans,” the report said.

The proportion of FHBs who believe it is a bad time to buy a home (9.0 per cent, up from 6.0 per cent) increased more than those who believe it is a good time to buy a home (67 per cent, up from 66 per cent).

The survey indicates that accessibility (the ability to enter the property market), as opposed to affordability (the ability to meet mortgage repayments), remains the key challenge for those wishing to enter the property market.

“Two in five prospective first home buyers indicated that high property prices are the greatest barrier to home ownership, while one in five suggested the barrier is saving for a deposit. This is consistent with March’s Streets Ahead findings and shows no improvement,” Genworth’s chief commercial officer Bridget Sakr said.

FHBs were also more likely to use sources other than their own savings for a deposit, a trend that has increased. The report found that only 51 per cent said they sourced the money for their deposit from savings, down from 66 per cent in 2014 and 72 per cent in 2013.

FHBs are increasingly turning to alternate sources of debt including credit cards (19 per cent up from 3.0 per cent in 2013) and personal loans (18 per cent up from 8.0 per cent in 2013).

This reliance on other sources of debt to fund deposits may explain why FHBs are more likely to be heavily indebted, at 35 per cent compared to the average of 23 per cent, the report said.

“Saving a deposit clearly remains a key obstacle for first home buyers looking to enter the market and points to the importance of low deposit options such as Lenders Mortgage Insurance (LMI) with more than half of first home buyers and first-time investors having used LMI,” Ms Sakr said.

“Two in five (40 per cent) prospective first home buyers expect to save a deposit of up to 10 per cent while a further 39 per cent believe they need a deposit of between 11 and 20 per cent.

“Only 21 per cent expected a deposit of more than 20 per cent was required.”

The report found that if purchasers were forced to save or secure a 20 per cent deposit, 30 per cent of respondents said they would have to wait longer to purchase while they saved a larger deposit and a further 14 per cent said they would abandon their plans to enter the property market altogether.

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