House prices might fall as much as 32% in the next three years; for anyone looking to sell or invest in residential or commercial property, this is a huge concern. The big beneficiaries in this situation will be renters. No one is looking to purchase when confidence in the property market is so low. Current social restrictions preventing Australians from viewing properties for sale or holding auctions will significantly affect property prices.
Renters may find some relief in the current circumstances. Properties usually rented through Airbnb will return to the domestic market in the wake of travel restrictions. This saturation will work in favour of tenants by reducing rental costs. These trends will make it difficult to earn a reasonable return on property investments, thus deterring many potential investors.
Policy focus and reasoning
On the basis of the current economy and property market, lending is very conservative. All lenders are asking for confirmation of income continuity and even self-employed borrowers are being requested to provide financial forecasts. The industry’s expectation is that a large number of borrowers will default on their home loans in the near future. To mitigate the effects of this, they are trying to balance continuity of lending with management of bad debt risk.
It’s also important to be aware that a large number of industries are closed to some lenders. Sectors including tourism, hospitality and retail have no confidence in employment, income and investment. This is unlikely to change in the near future.
Those experiencing financial jeopardy in their borrowing situation have relief options available. These include payment deferment and loan conversion:
Borrowers can currently defer their repayments for a period of 6 months. This means they’re under no obligation to meet principal and interest payments for that time. The interest of the deferment period is capitalised, meaning that borrowers will have the remaining loan term to pay back both the principal amount and additional interest accumulated.
For instance, if a loan has an interest cost of $5,000 per month, the estimated capitalisation for the deferment equates to approximately $30,000. That expense will be added to the principal amount borrowed and as a consequence, monthly repayments will increase when the deferment concludes.
Individuals should be aware that deferring repayments will be recorded on their credit files as a financial hardship lodgement. The likelihood that the strain is caused by the pandemic economy warrants no concession from banks. This means any future applications can be affected by deferring.
As an alternative, you may wish to consider converting your loan to interest only. This decision can substantially reduce your monthly repayments by postponing principal amounts. This has the potential to limit your repayments by approximately a third to a half, depending on how far into your term you are. This conversion can be either for a period of 12 to 60 months, depending on a servicing assessment. You can still make additional principal repayments during this time, should you choose to do so. This option means that you can continue to make repayments onto the loan and no hardship application is lodged, thus keeping your credit record and loan history clean. Rates are sometimes higher for interest only loans, but it’s always a smart decision to shop around and see what’s available.
Both residential and commercial landlords and tenants have been presented with a tumultuous situation. Individuals seeking legal clarity on their rights and obligations during this complicated time should seek advice from a professional.