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Lending hits an all time high for luxury property

By Matt Clayton

When we were all sent packing from our offices and businesses were thrust into chaos last year, our economy went into a spin. Interest rates began to drop periodically, government incentives were launched, and more buyers flocked to the market driving property prices through the roof. These astounding property prices are reflected in the lending sphere and it’s been a rollercoaster.

An interest rate bonanza

Both the stock and property markets are booming. The stock market is pushing all-time highs, and asset-backed investors are valuing businesses and their stocks 6-12 months into the future, perpetuating confidence. With such credence in the growth of the stock market, the continuation of record low interest rates and easy access to credit is being funnelled into the property market. How this impacts lending behaviour at the top end of the Lower North Shore market is most interesting.

Amid the uncertainty of this pandemic and the current ‘Delta Dampener’, the Reserve Bank of Australia’s decision to hold the official cash rate at 0.1% for the 10th month running is no surprise. But these enduringly low rates have inspired lower deposits. Lenders Mortgage Insurance is no longer avoided, with borrowers happy to borrow more rather than dipping into their share portfolio to fund a bigger deposit. 

As you know, we’ve had unprecedented growth in property prices. In the year to August, median home prices have jumped 19.4 per cent – the fastest rate of growth in 32 years. In the last 12 months, the number of properties for sale over $10m in the Lower North Shore has increased by 150 per cent.  

It’s safe to say, it’s not slowing down. With current lockdowns across New South Wales, and Victoria, market analysts are predicting that the first-rate hike won’t come until 2024.  Investor loans, albeit increasing, only account for 13% of all lending and new Home loan commitments reached $11.1 billion in New South Wales in June.

FOMO (Fear of Missing Out) powering pre-approvals

FOMO has reached a fever pitch. It is an insanely competitive market in the Lower North Shore. More properties are being sold off-market without public campaigns and the average number of bidders at auctions is consistently high; even the unorthodox process of moving auctions online hasn’t deterred today’s buyers.

In our market, I’ve seen the number of loan pre-approvals increase exponentially. Pre-approvals last for three months and enable clients to be one step ahead of the competition. They can bid with confidence at auction knowing their borrowing capacity. Pre-approved buyers are extremely attractive to sellers as they are ‘good to go’. This is inherently vital in this fast-paced market. 

However, the sheer volume of borrowers getting pre-approvals caused a whopping blockage for banks, who have had to overhaul their verification processes to deal with the backlog. In December last year, amid an influx of pre-approval requests, banks were achieving a dismal 6-10 week turnaround on approvals. It was truly frustrating for borrowers. In a matter of months, innovation and digitisation has increased efficiencies and we’re now experiencing 7-10 day approvals. 

Another observation of my borrowers is that, rather than putting all their eggs in one basket (or property), buyers are now opting for a myriad of choices. I’ve seen an emerging trend of ‘If I can’t have that one, I  will bid on the other one’ approach to buying.  The Lower North Shore is a global destination location and the availability of finance ready buyers isn’t the issue -it is instead,  the availability of properties to buy. So buyers are hedging their bids. 

Rising property prices driving different borrowing strategies

Firstly, catalysed by the sharp rise in property prices, loan sizes have increased. There is also a growing trend of higher loan to value ratios (LVR), which is the amount of the loan – expressed as a percentage – against the value of the property purchased.

Secondly, with higher loan to value ratios, Lenders Mortgage Insurance (LMI) comes into play. What’s fascinating in this market is that LMI is usually avoided at all costs. Yet, with my borrowers, the concern of paying LMI has seemingly dissipated if it means that buyers are able to secure finance for the property they want to purchase. 

Interestingly, Comprehensive Credit Reporting has ramped up in the last 12 months and credit profiles are being handled slightly differently. We’re so used to only negative credits on our reports, however now with Comprehensive Credit Reporting there is additional information like the type of credit we hold, whether we make payments on time, types of accounts, when they open, when they close and so on. It’s inherently more positive for the borrowers, with lenders now seeing a holistic view of a client’s credit, rather than just bank statements. 

Settlement periods have extended

As COVID-19 disrupted the lending world, banks just weren’t ready for the increasing digitisation of lending. Lenders were impacted by overseas operations, an overwhelming amount of paperwork and an influx of borrowers. Turnaround times had an average of 25 days in the second quarter of FY2022. This put pressure on being able to meet purchase settlement deadlines of 30 days.

It’s now become standard practice that settlement periods sit at 60 days. However, the digitisation of lending has improved significantly and some lenders, as well as independent brokerages, are now offering ‘same day turnarounds’ to incentivise borrowers who want to move quickly. 

Equity is buoyant

As reported by Core Logic, 97 percent of sellers made a profit in the March quarter. In Mosman, prices jumped by 21.3 per cent over the past 12 months and homeowners who sold during this period would have made an excellent profit.

These gains echoed for home owners who utilised rising property prices and increased equity to top up their mortgages by nearly $93 billion in the last year, as reported by the Australian Financial Review. 

Refinancing hit an all time high, and homeowners capitalised by spending on renovations, cars, small businesses and investments. For example, Mosman families spent up to $82.4 million on renovations and an average of $2.2 million on knock down rebuilds.

With interest rates at record lows, share values rising, FOMO driving the market into unchartered territories, and a change in borrowing strategies, we are facing unprecedented market conditions.  As the COVID-19 pandemic pushes banks into the digital era and equity remains high, I’m doing more loans over $7million in a month than I used to do in a year. These are high times, indeed. 

Talk to Matt if you would like any lending advice.

Matt Clayton
Mortgage Advisor, Loan Market
Lower North Shore
0414 877 333
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