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.