Interpac Business and Migration Solutions Melbourne Australia

(April 23, 2010)

Bigger loans and rising interest rates are making first home owners vulnerable to mortgage stress.

With some of the nation's biggest home lenders - Commonwealth Bank and Westpac - expected to slow the pace of their lending growth, after their exposure to residential housing hit record highs, buyers hoping to break into the market are likely to find it harder to secure a loan.

Over the past 18 months, first home owners have flooded the market, enticed by government grants and low mortgage rates. But a comprehensive snapshot of the mortgage market by brokerage JPMorgan and Fujitsu Consulting has shown first home owners are borrowing on average about $280,000. Remarkably, this is the same as established borrowers, who tend to earn more.

First home owners are borrowing a higher proportion of the cost of the house, at a higher multiple of their income. But with official cash rates on the rise, first home owners are finding it tougher to service their mortgages. ''The higher gearing tolerance of first owners results in greater sensitivity to rising interest rates,'' says JPMorgan analyst Scott Manning.

If mortgage rates approach the level before the financial crisis, Mr Manning calculates first home owners will be committing about half their post-tax income to interest servicing. Other borrowers will see their servicing of a mortgage rise to only 33 per cent of their post-tax income.

Bank chiefs insist there will not be a first home owners' time bomb and note that Australian mortgages are traditionally among the lowest-risk class of lending for banks.

A key factor in the case of a default is that the lender has recourse to the mortgage holder's other assets. In many states of the US, lenders have recourse only to the property that has been bought using the loan.

Even during the peak of the global financial crisis, the big Australian banks reported only a slight increase in lending losses on mortgages and the signs are this figure has started to stabilise.

''It's an asset class we understand very well and there's robust risk-management practices around that,'' says Westpac chief executive Gail Kelly.

Fujitsu Consulting managing director Martin North expects that even if interest rates move another 2 or 3 percentage points higher, the broader economy would absorb this and house prices would stay resilient. ''But a small proportion of home owners would fall off their perch because they'll be so severely stressed, and it will be among young families and first home buyers.''

With rates at reasonable levels the past three years, the big four banks have raised their share of the mortgage market to about 80 per cent. But with their exposure to housing at a record high, analysts believe banks are losing their appetite for more mortgage growth.

(Source from:theAge)