Low Rates Save Home Buyers

HOME loan borrowers in NSW are enjoying the effects of the falls in interest rates, with the number of borrowers getting behind in their home repayments dropping over the past year.

According to the Housing Loans Insurance Corporation, the country's biggest mortgage insurer, the number of loans reported as being in arrears by four months or more fell by 10 per cent between December 1990 and December 1991. This means that substantial improvement was made in the second half of the year, since HLIC had reported a 29 per cent increase in loans in arrears between December 1990 and the following April. In fact arrears peaked in July 1991 and have been dropping since.

Another mortgage insurer, MGICA Ltd, tells a similar story. A MGICA survey of the arrears situation of more than 40 secondary lenders in Australia (ie not including the Big Four banks) found that in NSW, the proportion of home loans in arrears peaked in the March quarter of 1991 at 0.81 per cent, that is, less than 1 per cent of the total home loans. By the December 1991 quarter it had dropped to 0.49 per cent.

Australia-wide, the peak in arrears occurred in the September 1991 quarter at 0.96 per cent of the total home loans, but dropped quite dramatically to 0.63 per cent by the December quarter.

However, while the number of loans in arrears has fallen the recession and the historic highs in home loan interest rates of 1989-90 are still having an impact, with a big increase in the number of mortgagee-in-possession cases over the past year.

The HLIC reported that the number of homes taken possession of by lenders increased by 77 per cent between December 1990 and December 1991. However, since the legal processes involved take considerable time, this mostly reflects the difficulties experienced by people during the rate peak period of 1989-90.

Mr Kevin Clay, an auctioneer and chairman of the national real estate chain EAC Multilist, says the number of mortgagee-in-possession properties coming onto the market has "certainly increased, and reasonably dramatically, in the last 12 months". These have been spread through all sectors of the market, from top to bottom. As he notes, though, it is impossible to gauge the proportion of properties on the market that could be regarded as forced sales, where the owners are selling because they can't meet their repayments but the lender has not actually stepped in to take possession.

Fortunately, though, NSW borrowers have managed comparatively well. This is because property price falls have not been as great as in some other States and nor have unemployment levels been as high.

MGICA says NSW has a disproportionately low percentage of arrears cases compared with the rest of Australia. Although 38 per cent of MGICA's loans are in NSW, only 28 per cent of the arrears cases are currently in NSW.

The greatest pain has been felt in Victoria and Western Australia, where unemployment levels are higher. In fact, Mr Peter Bartlett, HLIC's chairman, says 67 per cent of all HLIC's mortgagee-in-possession (MIP) cases are in Victoria: "If you took Victoria out of the arrears and MIPs they are no more than at any other normal time. Borrowers seem to be coping with the situation."

Home loan affordability ratios supplied by MGICA throw some more light on the reasons for improvement in the proportion of home loans in arrears. The home loan affordability ratio - home loan repayments expressed as a percentage of income - peaked in NSW at 44.7 per cent in December 1989. It has since fallen to 34.9 per cent. Says MGICA managing director Mr Ian Graham: "People with existing mortgages are now paying lower rates, therefore there is less stress on them and therefore the improvement in the default rate will continue to track down."

Says Mr Bartlett: "It is a mental thing really. As interest rates fell lower and lower, people did everything they possibly could to hang on to their houses, and it looks like they succeeded."

Mr David Hedgeco, senior manager of lending services for the Commonwealth Bank, says the Commonwealth's number of loans in arrears cases are "increasing slightly but not to the stage where we are panicking". He says most of the people who are in trouble with their loans were those who bought at the top of the market in 1988-89, before interest rates peaked, but then found themselves unable to service the debt as rates moved higher.

"People borrowed fairly heavily on what seemed like sound loan to valuation ratios which have been eroded a bit now because prices have fallen back."Meanwhile, salary cut-backs through loss of overtime, bonuses or worse, loss of a job, left borrowers unable to service their debt.

The loan to valuation ratio is the crucial factor which determines whether people who are unable to meet their loan repayments will be able to get through their difficulties or whether they will be forced to sell. As Mr Hedgeco explains: "If your house is worth $200,000 and your debt is $60,000 the bank can stand behind you for quite a long time. But if your house is worth $200,000 and your debt is $180,000, there is little scope to do anything because the debt increases so rapidly if there are no repayments. Pretty soon the debt is greater than the value of the property."

For this reason the Advance Bank has reduced its allowable loan to valuation ratio from 95 per cent to 90 per cent. Says spokesman Mr Arthur Delbridge: "We discovered over a period of time that 5 per cent equity scratched up really left people with a loan that was difficult to service if circumstances changed." Of Advance Bank's total home loan portfolio of 64,000 loans, the proportion in arrears at the end of February was "less than 2 per cent", which Mr Delbridge says is "better than at any time since 1988-89". The Advance is currently mortgagee-in-possession of about 30 loans nationally -about double the number it reported in June 1991. Mr Delbridge says loans in Victoria represent "by far the biggest problem".

Mr Hayden Park, spokesman for the National Australia Bank, says: "There probably has been some increase in the delinquency level but nothing we can't handle."

He says less than half of 1 per cent of the bank's portfolio of home loans are in arrears. Meanwhile the number of mortgage-in-possession cases for the NAB is "really almost negligible", which he attributes to the bank's prudent loan to valuation limit of 80 per cent.

All banks ask borrowers who can't meet their repayments, or know they soon will be unable to do so, to contact them so that they can try to come to an arrangement which takes the pressure off repayments until the financial difficulties are passed. This may involve a temporary repayment "holiday", interest-only repayments for a while, or an extension of the loan term so that each repayment is smaller. If it appears the borrowers will be unable to manage the repayments in the medium term, the banks would much prefer that they sell the house themselves before the debt blows out and their equity is diminished or lost. This is much better than the costly and painful route of mortgagee-in-possession.