Mortgage Finance

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EXPERT OBSERVER
When discussing housing affordability, older Australian tend to point to much higher interest rates in the past as being a challenge while for younger Australians, higher property values are seen as the biggest barrier to home ownership. The truth of the matter is it is much more nuanced than this, but on balance I would say it is much harder to break into the housing market now than it has been in the past but it is not due to much higher property values alone. Let’s take a look why.
Although dwelling values have reduced over recent years, housing is in most instances (much) more expensive than it has been in the past. While this is an important consideration it is not the be all and end all.
One of the commonly repeated memes is that interest rates were high in the early 1990s thus making buying a home difficult. What probably made buying a home more difficult at time was the fact that the unemployment rate reached as high as 11.2% compared to the 5.2% today however, once again it is a bit more nuanced than that. When unemployment peaked, the male workforce participation rate was 73.8% which is actually higher than it currently is (70.9%) while the female participation rate was 51.9% compared to the historic high of 61.1% it is currently.
Furthermore, although the unemployment rate peaked at 11.2% in December 1992, the underemployment rate at that time was 7.8% compared to the 8.9% it is currently. Delving a little deeper to look at underemployment for those likely to be saving for a mortgage, the underemployment rate in December 1992 for 15-24 year olds and 25-34 year olds was 13.3% and 6.7% respectively in 1992 compared to 20.7% and 7.2% respectively today.
Although the unemployment rate was much higher in 1992 than it is today, there were fewer females in the workforce. Individuals that had a job were more likely to be getting as many hours as they wanted compared to today’s workers, particularly younger workers, the ones most likely to be trying to save a home deposit. The fact that female participation has lifted so much over recent years also points to the fact that saving for and paying off a mortgage increasingly requires more than one income.
Another factor pointing to entering the housing market being more or just as difficult in the past as it is today is the higher interest rates in the early 1990s. If you had a mortgage at that time that was certainly a somewhat difficult time however, if you were saving for a deposit at that time you were also receiving substantially higher rates of interest on your savings. When standard variable mortgage rates for owner-occupiers hit their peak at 17% between June 1989 and March 1990, 12 month term deposit rates for savers hit as high as 16% but ranged from 14.2% to 16.0%.
Today, standard variable mortgage rates are recorded at 4.94% and 12 month term deposit rates are 1.65%. Both are at historic lows however, the gap between the term deposit and variable mortgage rate is only slightly lower than its historic high and much larger than it was in the past. While a current potential buyer may be looking to save for the mortgage, they aren’t getting the assistance from higher interest rates that they may have in the past.
Inflation is also a key consideration in this discussion. Inflation is at record low levels currently and was much higher in the past. While many people tend to not consider it, higher inflation is typically accompanied by higher interest rates but equally if the cost of everything is increasing more rapidly, it results in the erosion of the real value of a mortgage. Given this, higher inflation should lead to mortgagees being able to pay off their mortgage quicker. While this doesn’t necessarily impact on those people saving for a deposit it does mean that once they take out a mortgage, paying it off is relatively easier with higher inflation than it is with lower inflation.
Saving a deposit for a mortgage has always been difficult. When I first took out a mortgage I was lucky that my parents were able to assist. Equally, when my parents first took out a mortgage in the 1970s they had parental assistance and my children will most likely need assistance from my wife and me.
Unfortunately, not everyone is in a position to receive the same assistance and when you look holistically at the current factors of high property values, insecure employment, low inflation and subsequently low interest rates, I think it is more difficult than it has ever been to save for a mortgage. Supporting this opinion is the fact that the share of households that are renting continues to rise while the share of owner-occupier households both with or without a mortgage continues to fall.
Improving access to potential first home buyers is extremely difficult, with grants tending to push values higher but it is clear something needs to be done. Unfortunately, falling dwelling values have broader repercussions for the economy because so much household wealth is tied to housing. Ideally, after recent value declines we see the housing market show modest gains over the coming years which would continue to gradually improve affordability over time. In saying this, it still doesn’t really address the challenge that saving a deposit continues to be the biggest hurdle and low interest rates look to be in place for a number of years to come.
CAMERON KUSHER is the head of research for the Australian branch of CoreLogic.
Kusher regularly posts on the <a href="https://www.corelogic.com.au/news" target="_blank">CoreLogic website</a>.
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Saving for a mortgage deposit is harder than ever before: CoreLogic's Cameron Kusher

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Australian Finance Group Ltd will merge with the mortgage aggregation business Connective Group Pty Ltd, according to their official website.
The partnership will create a "momentous national mortgage distribution network", with more than 6,575 brokers and $76 billion in combined mortgage settlements this financial year.
Connective Group Pty Ltd will reportedly receive $60 million in cash, and 30,886,441 AFG shares, as part of the agreement, with AFG to fund the bulk of the cash component through a new corporate debt facility.
The merged business will have a significant national footprint in Australia’s $1.8 trillion home loan market.
"The expanded distribution channel and broader diversification of products the combined group can supply will provide greater choice for both brokers and consumers," according to AFG Chairman Tony Gill.
Connective CEO Glenn Lees said "the coming together of the Connective and AFG teams is a natural fit".
While bound by a binding conditional implementation deed entered into by both parties, the agreement remains conditional until a court validates the legality of the transaction.
Official approval from both company’s shareholders, and from the Australian Competition and Consumer Commission (ACCC), are also required before the merge can be executed.
AFG expects the merge to be completed in the second half of FY2020 (between June and September next year).
AFG has indicated their intent to "keep the market informed of progress of satisfaction of the conditions precedent to the transaction in accordance with its ASX continuous disclosure obligations".
Law firm Norton Rose Fulbright advised Connective Group on the deal valued at $120 million. 
The team was led by corporate M&amp;A partner Jasmine Sprange, restructuring partner Alex Mufford and special counsel Bernie Walrut, and was supported by special counsel Sarah Chen, senior associate Oliver Kabongo and associates Michael Phillips and Liya Wu, with specialist support from partners including Belinda Harvey.
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AFG to merge with mortgage aggregator Connective

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CBA and subsidiary Bankwest are axing reverse mortgages, making them the last of the major lenders to pull out of the $3.1 billion sector.
Beginning next year, the service will no longer be offered, however, it will continue providing it to existing borrowers.
It follows in the footsteps of Westpac Group and Macquarie Bank who withdrew from the market late last year.
This leaves only Heartlands Seniors' Finance, IMB Bank and P&amp;N Bank as the remaining significant players, according to Canstar analysis.
However, the federal government is entering the sector with a low-cost reverse mortgage scheme providing a public sector alternative.
Demand for the products is predicted to grow in an ageing community where seniors have billions of dollars in equity in their family home that can be tapped by a reverse mortgage, according to regulators.
CBA predicts 20% of Australians will be over 65 within 12 years.
Selling of the products, recently came under fire from regulators concerned about the quality of advice.
Improved scrutiny and advice and tougher regulations are expected, particularly in the wake of expected improvements to borrowing standards in the wake of the banking royal commission. 
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CBA the final big four lender to axe reverse mortgages

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A national snapshot of refinance applications made to mortgage marketplace HashChing has pinpointed the suburbs in Australia where borrowers are paying the highest interest rates.
The data, which analysed more than 1,000 mortgage applicants over December 2017 and January 2017, found several suburbs in Sydney, Melbourne and Brisbane where borrowers were paying well above the average home loan interest rate.
In Sydney, the average interest rate is 4.46 per cent, however mortgagees in The Ponds, Doonside, Quakers Hill, Campbelltown and Stanhope Gardens are paying up to 7.88 percent.
The average interest rate in Melbourne is 4.46 percent, but borrowers in Blackburn, Glen Waverley, South Morang, Mernda, Narre Warren and Cranbourne are paying as much as 7.04 percent interest.
Brisbane’s average interest rate is 4.72 percent, however home owners in Coomera, Advancetown, Austinville, Labrador, Surfers Paradise, Brendale and Springbrook are paying off home loans with interest rates as high as 7.39 percent.
Mandeep Sodhi, CEO of HashChing, said one of the main drivers of higher interest rates in those suburbs was the large population of self-employed borrowers.
“The data demonstrates that mortgagees who are paying interest rates of more than 5 per cent tend to be currently or formerly self-employed.
“Previously, banks charged higher interest rates for self-employed borrowers as they were deemed riskier due to an unstable income.
"However, the market has changed, and banks have become more amenable to offering a competitive interest rate to these customers,” he said.
The average interest rate for self-employed borrowers was found to be as much as 1 per cent higher than it was for salaried borrowers.
For a $500,000 loan over a 25-year term, this can amount to paying an additional $87,383 over the life of the loan.
“Self-employed borrowers may not realise they can get a better home loan rate, especially as this information isn’t being communicated from their bank or lender.
"This disconnect is costing them tens of thousands of dollars,” said Mr Sodhi.
HashChing is a mortgage marketplace connecting customers looking for good home loan deals with experienced mortgage brokers nationwide, rated and reviewed by customers.
Since launching 18 months ago, the business has received more than $3 billion worth of home loan applications.
HashChing deals with all lenders, including non-banks, online providers, building societies and credit unions through their network of partner mortgage brokers.
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