House prices in areas where a large portion of households took low-deposit mortgages could be at risk of faster and bigger declines if homeowners find it tough to meet their increased mortgage repayments, experts say.
“Highly leveraged areas tend to be more sensitive to changes in the credit environment, so we might start to see evidence of a decline in property prices sooner rather than later,” said Eliza Owen, CoreLogic’s head of research.
While not all highly leveraged homeowners were vulnerable to the rising interest rate, they were generally considered high-risk borrowers as they have taken out a large loan relative to the amount they initially had saved, said Nerida Conisbee, Ray White chief economist.
“Rising rates are likely to place more pressure on homeowners who purchased on a high loan-to-value [LVR] loans, so technically, areas where people have high leverage are likely to be at risk of greater falls in pricing if people find it difficult to pay off loans,” she said.
Analysis by mortgage brokerage Loan Market found that about one in three borrowers in Queensland, ACT, Western Australia and the Northern Territory took out a mortgage with a deposit of 15 per cent or less last year.
In NSW and Victoria, one in four homebuyers had borrowed on a low deposit, 29.3 per cent in South Australia and 21.8 per cent in Tasmania.
In NSW, Hunter Valley suburbs Bellbird and Aberglasslyn were the most exposed, with 69 per cent and 51.6 per cent of homebuyers borrowing on low deposit to afford the rapidly rising house prices in the area. In Victoria, more than two in five homebuyers in Bendigo and Hepburn Springs and more than half in Leopold may be vulnerable to rising interest rates.
More than half of homebuyers in Brisbane suburbs Carseldine and Bald Hills took out high-LVR loans while almost two-thirds in Blackstone in the Ipswich area have borrowed large amounts relative to value of the property.
“These are the areas where risks would show up,” said Shane Oliver, AMP Capital chief economist.
“When households are these highly leveraged, it’s usually a sign that the budget is fairly stretched as well.
“Hopefully, the banks have done their serviceability tests appropriately and people haven’t lied in making their loan applications, but still, high leverage is usually a sign of high risk.”
People with high LVR mortgages were also more likely to fall into negative equity if the property market fell, as expected, said Sally Tindall, director of research at Rate City.
“Borrowers who can keep up with their mortgage repayments don’t have to worry about selling at a loss, but being in negative equity can lock people in ‘mortgage prison’ until they get a decent amount of equity behind them,” she said.
Homebuyers who have used maximum borrowing capacity may not be able to refinance to a cheaper rate, as the new lender will assess their ability to repay the debt on rate higher than they were on originally, said Alan Hemmings, chief executive of HomeLoanexperts.
