Income thresholds a more pressing problem, says Mortgage Choice franchise owner
Labor Treasurer Jim Chalmers’ plan to upend how student debt plays into first-home buyers’ serviceability requirements received a mixed response this week.
Although everyone – even the opposition – agreed that it was a commonsense approach to helping those with student debt on to the housing ladder, others voiced criticisms that it was a vote-grabber with little tangible impact.
The new proposals will persuade banks to put aside borrowers’ existing student debt when applying responsible lending rules, which should theoretically increase borrowers’ lending power.
However, the scope of the proposals is unclear, with the assumption being that only those whose debts are nearing the end of their life cycle will benefit.
Some commentators said the proposals avoid the real issues facing FHBs.
Peter White, from the Finance Brokers Association of Australia (FBAA), for instance, explained how “the current 3% mortgage serviceability buffer is one of the largest obstacles in the assessment process and is preventing thousands of Australians from purchasing a home and forcing thousands more to remain in 'mortgage prison' unable to refinance”.
The LNP opposition has a similar stance on the 3% buffer.
To get the broker-side view of the issue, MPA caught up with James Algar (pictured, second from left), a franchise owner at Mortgage Choice, to discuss the matter.
A faulty system
“There’s no doubt HECS debt and mandatory repayments to what they’re earning is a significant imposition to people’s borrowing capacity,” said Algar.
Some would, therefore, argue that banks should reasonably be allowed to consider HECS obligations when assessing your borrowing capacity, given it is money that does not enter your bank account.
But there are valid arguments against this.
“(The banks) are making a decision on (a borrower’s) ability to pay for the next 30 years, based on something that’s definitely not going to be there in the short term,” said Algar. In other words, short-term HECS obligations are unfairly skewering an FHB’s long-term borrowing capacity.
To combat this, Algar often advises FHBs to use a portion of their deposit to pay down the remainder of their HECS, if it makes sense to do so. Your borrowing capacity “can be significantly higher as a result”, he said, even if it makes for a smaller deposit.
He described a situation involving a borrower with $90,000 income, $10,000 in remaining HECS, and monthly mandatory HECS repayments of around $375. Taking $10,000 out of the borrower’s deposit to pay down their HECS resulted in a $60,000 increase in their buying power.
It highlights the inadequacy of the current system – a $10,000 debt obligation, which, mind you, does not have variable interest rate complications, can drastically alter your long-term borrowing capacity.
Unfortunately, fiscal drag throws up another complication for borrowers. With wage growth thankfully growing, more and more young professionals are being dragged into higher income brackets, therefore increasing their monthly HECS obligations.
This can make “a huge, huge change in your borrowing capacity”, said Algar. He cited an instance where an FHB’s borrowing capacity was reduced by $100,000 after moving into a higher income bracket.
Benefitting first-home buyers
The point is, lifting HECS payment thresholds would likely be a far greater benefit for aspiring FHBs than marginal changes to the banks’ serviceability policies.
These thresholds “are not keeping pace with the wage growth”, said Algar. “We’re seeing nurses, teachers and police officers, almost in every case they’re earning over $100,000. We’re trying to say we’re supporting these key workers but we’re still expecting them to pay a larger and larger slice of their wages back to HECS.”
Algar’s comments reflect the broader sentiment around Chalmers’ bright idea – a no brainer, but one that fails to properly address home loan affordability.
He also said there is an argument to reduce the 3% serviceability buffer at a time when interest rates are expected to start falling. The buffer “has done its job”, he said, but when we’re at the top of the rate cycle, stress testing home loans at 9-10% makes little to no sense.
“I don’t think there’s a single economist in the world who thinks interest rates are going to be at that level,” said Algar. Although the Reserve Bank of Australia might have a shock in store for us when policymakers convene next week.
