Keep calm, borrowers are fine, says broker

by Julia Corderoy19 Jun 2015
Despite the number of concerning media reports about increasing household debt, one Sydney-based mortgage broker argues that consumers are well-placed to handle future interest rate hikes.

Leon Vrontamitis, a mortgage broker for Smartline in Sydney’s North Shore, says that although there will always be individual circumstances where people unfortunately find themselves in mortgage stress, the majority of borrowers are prepared to handle a modest increase in interest rates.

“When banks assess a client’s ability to repay a loan they use a ‘test’ interest rate that is almost always above 7.00% p.a.” he said.

“This means that most variable rates would have to increase by around 2.50% before clients could potentially struggle. In fact, some lenders assess repayment capacity at 8.00% p.a., which is nearly double the current interest rate.”

According to Vrontamitis, the average monthly variable interest rate over the last 10 years is approximately 6.71% per annum, meaning that the "test" rate is even above the long term variable interest rate.

Whilst Vrontamitis told Australian Broker that he has witnessed a lift in mortgage settlements in the current environment, especially as a Sydney-based broker, it doesn’t mean the quality of borrowers has slipped.

“As I'm based in the Sydney metro area, I've seen a high demand from home buyers driven by the fear of missing out, as it is well publicised that the demand for quality homes far outstrips supply,” he said. “So they are not necessarily driven by the low interest rates but by the desire to own a home. 

“With regards to investment property buyers, I have definitely seen an increase in demand because with falling rates, investors can increasingly find cash flow positive properties where the rent is higher than the mortgage interest. However, my clients have tended to invest outside of Sydney, primarily in Brisbane where yields are better.

“I can't say I've noticed an increase in the risk profile of borrowers. Banks require that buyers still need to have a decent deposit and sufficient income to service the loan, with a buffer applied to the interest rate. For borrowers with relatively low deposits, banks look for evidence of ‘genuine savings’, i.e. that the borrowers demonstrate capacity to save.”

In fact, he says that the vigorous focus on prudent lending standards means there is less probability that high risk borrowers are approved for a loan today. However, the fact does remain that to buy a house in Sydney means taking on more debt than you may want to.
 

COMMENTS

  • by Regional Broker 19/06/2015 8:43:51 AM

    Very good comments , agree completely.

  • by Robert B 19/06/2015 9:11:21 AM

    Bravo, Totally agree.

  • by Michael Kent 19/06/2015 9:13:53 AM

    I disagree!

    Yes all lenders test applicants at a higher rate BUT servicing does not take into consideration an applicant losing their job or having sudden medical bills or various other changes in lifestyle.

    Plus the fact "loan massaging" is rampant. I am amazed at the amount of brokers out there willing to fudge figures to make servicing work.

    Saying applicants have 2 kids when they know they have 4, putting car loan repayments at $400pm instead of $800pm, credit card limits at $10k when they are $30k.

    I had a client recently ask me why the maximum I could get her was $350k when another broker told her if he didn't tell the bank about her 2 kids or her car loan he could get her $650k which is what she wanted.

    With any decent home in Sydney being outrageously expensive and young couples borrowing $700k+ any slight increase in rates will put enormous strain on that couple.

    $700k at 4.5% = $3,546.80 per month
    $700k at 6.5% = $4,424.48 per month

    All of a sudden that young couple has to find an extra $878 per month.