These 5 trends will reshape Australia’s mortgage market in 2022

Australia’s mortgage market has already begun to shift in the wake of the Covid-19 pandemic.

Property prices are sky-high, supply is scarce and many suggest an RBA rate hike is on the horizon.

Over the next 12 months, we can also expect more a drop in buyer demand, a shift back to inner-city living from regional Australia, and the possibility of further macroprudential controls,

And all this change is going to have a significant influence on our mortgage market during the year ahead.

Proptrack economist Paul Ryan highlights 5 key trends in Australia’s mortgage market that we should all watch out for in 2022.

1. Interest rates are rising

The RBA left official interest rates unchanged for March, and the Bank has reiterated its established position regarding the future direction of rates, with rate rises clearly off the agenda for the foreseeable future.

But what is clear is that interest rates are going up, although the timing remains uncertain.

Despite the RBA standing firm, rates paid by borrowers on their mortgages have already started to increase.

Fixed rates lifted across the board, although the big 4 banks have hiked more aggressively than many of the low-cost lenders.

In the past 4 months, CBA and Westpac have hiked interest rates 6 times, while NAB and ANZ have hiked 5 times.

And Ryan expects this trend to continue slowly throughout the year, with larger increases in the amount borrowers have to pay once the RBA moves the cash rate up.

Ryan expects the RBA to start raising the cash rate in August (possibly June) after news of more strong inflation data, unemployment below 4%, and wages growth pushing up to 3% and see the cash rate rising to around 1.5 to 2% over the next two years or so.

However, our team at Metropole believe “official” rates won’t rise in 2022

2. Variable rates will become more popular

Rising interest rates have been driven by fixed-rate repricing, while variable mortgage rates are still falling.

Around 15% of new mortgages are usually taken out with fixed rates, Ryan explains.

But fixed rates became the mortgage of choice during the height of the Covid-19 pandemic as the RBA’s liquidity support lowered fixed rates in particular.

But now the mortgage market is returning to more normal conditions, which means fixed-rate products aren’t priced as favourably.

That means more and more people are taking out variable loans - a trend Ryan expects will continue throughout the next year.

“Expect the share of variable rate loans taken out over 2022 to head back towards three-quarters, despite the expectations that interest rates will increase in coming years,” he says.

3. Investor lending will grow

Housing loans for investors struck a record high in January, as new figures showed the growth in Australian house prices was at its slowest pace since October 2020.

The Australian Bureau of Statistics said loans for housing rose 2.6% in January to $33.7 billion.

Of these, owner-occupied mortgages rose one per cent to $22.7 billion, while investor home loans jumped 6.1 per cent to a record $11 billion.

Lenders have already responded to the pickup in investors, with increased competition pushing down investor interest rates to their lowest level relative to owner-occupier rates in recent years, Ryan notes.

“Look for investor lending to continue to grow, and even more lender competition for investors over the coming year.”

4. High Loan-to-Valuation loans will be difficult to get

With the jump in property prices over the past couple of years, saving a 20% deposit for a home loan is getting more and more difficult.

The average house deposit is now in excess of $100,000.

And unfortunately, that isn’t going to change.

Ryan expects that securing a home loan with a small deposit (less than 20%) will become even harder going forward.

From the period before the pandemic, the share of high-Loan to Valuation (LVR) loans (a 90 LVR loan is one with a 10% deposit) has fallen 20%, to only 7.5% of new loans.

And the share is even smaller for investor loans.

Why?

Partly because of APRA’s guidance to limit high-LVR loans to mitigate housing market risks.

Also, late last year the regulator instructed the big banks to raise the repayment risk buffer from 2.5% to 3% above the headline rate secured by new borrowers.

The tightening of lending conditions will impact all new borrowers regardless of the “risk” circumstances of local housing markets.

“Expect high-LVR loans to continue to be hard to get going forward,” Ryan says.

“This makes programs like the Federal Government's First Home Loan Deposit Scheme, where the government guarantees the shortfall of a first-time buyers' deposit, increasingly valuable for those looking to get a foot into the housing market.

"But places in this scheme are capped, and in high demand.”

5. Interest-only loans will be scarce

The volume of interest-only loans hit record lows in 2021 as loans continued to expire and new loans continued to decline.

By March 2021 only 14% of the outstanding housing loan stock by value was on IO terms, which is comfortably the lowest share on record.

Lenders have generally shied away from interest-only mortgage repayments since APRA brought in moves to limit the amount in the market back in 2017.

Now, these loans have interest rates around 0.86% higher than principal and interest loan repayments, Ryan explains.

“This interest rate differential has been increasing,” he says.

“Expect it to remain high, as lenders seek to keep the share of interest-only mortgages on their books to low levels.”

ALSO READ: Will the Ukraine crisis really cause property values to tumble 15%

About Joseph Ballota Joseph is a Property Coach who put hundreds of people on the road towards wiping away their mortgage in under 5 years through expert Property Investment Plans.