Sourced from AFR 14/6/2018 Author Duncan Hughes
A typical deposit on a $1 million residential property has nearly tripled from about $50,000 to $150,000 as borrowers commit to tougher standards demanded by regulators, increasing pressure on the Bank of Mum and Dad or unsecured loans to make up shortfalls, lending analysis shows.
Deposits required for nearly eight-out-of-10 loans have increased from a minimum of about 5 per cent of the property price to about 15 per cent of the price for investors and 12 per cent for owner-occupiers, it shows.
A few lenders, such as non-authorised deposit institution Pepper Money, still offer loans with smaller deposits but large lenders, typically the big four, require up to 20 per cent.
Sharp increases in minimum deposits has been happening for the past three years as prudential regulators began attempting to put a lid on rising property prices, particularly in Melbourne and Sydney.
But the increase in total national debt suggests borrowers could be scraping deposits through credit cards, personal loans or loans from their parents, especially those wanting to get above a deposit of 20 per cent to avoid having taking out expensive loan mortgage insurance.
Sally Tindall from RateCity, which monitors interest rates and costs of financial products, said the push to higher deposits could be creating additional risks and unintended consequences.
Bank of Mum and Dad
Ms Tindall said: “Home buyers no longer need one or two incomes to get their first property. They now need three, including their mum and dad. Even then many are struggling to stump-up the funds for the required deposit.”
Time taken to save a home deposit putting aside $500 a week at a generous 3 per cent interest is more than five years, during which time house prices in Melbourne and Sydney have increased by 50 per cent, according to RateCity analysis.
Ms Tindall said it could explain an increase in the use of unsecured debt and cross-collateralisation of property, especially parental guarantees, to achieve a lower deposit.
Soaring property values, lender demand for bigger deposits and tougher terms are contributing to a 25 per cent increase in contributions by the so-called Bank of Mum and Dad (parents lending to their children for home purchases) to about $20 billion in the past 12 months.
Recent government analysis shows that home ownership for under-40s slumped from 36 per cent to 25 per cent from 2001 to 2014, while mortgage debt in the group increased from about 89 per cent in 2002 to 94 per cent in 2014.
Ratings agencies warn mortgage delinquencies will increase moderately in 2018 as house prices soften, especially against low wage growth, and possible interest rate hikes, ratings agencies warn.