How Rising Property Prices Affect Your Home Loan and Buying Potential

Here’s the good news: the Australian real estate market has been experiencing significant growth in recent years, with house prices in major cities reaching record highs. It can be a huge win for homeowners and investors, especially those planning to sell their properties soon. However, this can be an issue for potential property buyers, including first-time homebuyers and those looking to upgrade their homes. 

Today, let’s dig deeper into this topic and find out how rising house prices in Australia impact your home loan options and buying potential in the local property market.

Deposit Requirements May Be Harder to Meet 

As property prices increase, so does the amount needed for a deposit. Most lenders in Australia require a minimum deposit of 20% of the property’s value to avoid Lenders Mortgage Insurance (LMI). With the median house price in Sydney and other capital cities now exceeding $1 million, a 20% deposit would amount to over $200,000. This substantial increase in deposit requirements can dramatically extend the time needed for potential buyers to save, pricing many out of the market.

If you can’t meet the 20% threshold, you may need to pay for LMI. LMI protects the lender if the borrower defaults on the loan, but it can add thousands of dollars to the upfront and overall cost of purchasing a property. As property prices rise, so does the cost of LMI, further increasing the financial burden on prospective buyers.

You May Have Less Borrowing Power 

Higher property prices often require larger loan amounts, which can, of course, affect your borrowing capacity. Lenders assess your ability to repay a loan based on your income, expenses, existing debts and other relevant factors. While your income may remain relatively stable, the loan amount required to purchase a property surges with rising prices. This can result in a higher debt-to-income ratio, potentially limiting the amount you can borrow or disqualifying you from certain loan products.

Also, it’s worth noting that Australian lenders are mandated to apply a buffer and evaluate your ability to repay the loan at a higher interest rate than the current rate (typically 2-3% higher). As loan amounts swell due to soaring property costs, this lender’s assessment becomes more stringent, reducing your borrowing power.

It May Be Challenging to Maintain a Favourable LVR

Lenders usually use the Loan-to-Value Ratio (LVR) to assess the risk of a home loan. They calculate the LVR by dividing the loan amount by the property’s value. But as house prices in Australia rise, it becomes more challenging to maintain a favourable LVR, especially for first-time homebuyers or those with limited savings.

A higher LVR is generally considered riskier by lenders, which can result in higher interest rates or the need for LMI. Some lenders may not also offer certain loan features or products for high LVR loans, and that can limit your options and flexibility.

Mortgage Stress Can Affect Personal Finance

As soaring real estate prices often lead to larger mortgages, these can also increase the risk of mortgage stress. Mortgage stress typically occurs when more than 30% of pre-tax income goes towards mortgage repayments. With larger loan amounts necessitated by higher property prices, more households may find themselves in this situation, particularly if interest rates rise in the future.

This increased financial pressure can have ripple effects on other areas of personal finance. Essentially, it can limit your ability to pay your other bills, save for retirement, invest in another property, grow a business or manage unexpected expenses.

You May Have to Adopt Significant Lifestyle Adjustments

As prices rise, many buyers may need to adjust their expectations regarding the type of property they can afford or its location. This might mean considering apartments instead of houses, looking in outer suburbs rather than inner-city areas, or exploring regional locations instead of capital cities.

While this can open up new opportunities, it may also require significant lifestyle adjustments or increased commute times, factors that need to be carefully considered when making a property purchase decision.

Tips for Dealing with the Rising House Prices in Australia

• Start saving early and aggressively: With deposit requirements increasing, it pays to begin saving as early as possible. Consider high-interest savings accounts or term deposits to maximise your savings. Improving your credit score and sticking to good money habits can also help you purchase a home faster. 
• Explore government assistance programs: Look into initiatives like the First Home Owner Grant or the First Home Loan Deposit Scheme, which can help eligible buyers enter the market with a smaller deposit. You can also use your super for loan deposit through the First Home Super Saver (FHSS) Scheme. 
• Consider alternative property types or locations: Be open to different property options or locations that may offer better value for money. For instance, Tasmania is becoming the new frontier for smart property investors. House prices in Tasmania are generally lower than in other Australian states, and many suburbs, like Launceston and Devonport, are becoming property hotspots. 
• Seek professional advice: Talk to an experienced mortgage broker or financial advisor who can advise you based on your specific situation and the current market conditions. For instance, here at Deltos Finance, we have local mortgage brokers in Hobart, Richmond, and other areas ready to explain property prices, the best home loan rates, and the local housing market. 
• Be patient and strategic. Don’t rush into a property purchase because you fear missing out. Take the time to research thoroughly and wait for the right opportunity that aligns with your financial capabilities and long-term goals.

Let Our Mortgage Brokers Guide You

Rising property prices present both challenges and opportunities in the Australian market. As you understand their impact on home loans and buying potential, you can implement strategic approaches to deal with the market effectively and work towards achieving your property ownership goals. If you need more assistance securing your first home or next investment property, feel free to reach out to us.

Our seasoned mortgage brokers in Tasmania have a 94% success rate in getting home loans approved. We can also help you buy your property sooner with the best home loan rates and a 5% deposit saved. Simply put, we’ll do our best to turn the challenge of rising house prices in Australia into the best real estate opportunity.