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Sydney\’s Mortgage Loan Modification Success Stories: Profitable Outcomes – Getting a job, maintaining a decent credit history, saving for a deposit and applying for a home loan was the easiest way to own a property in Australia. But was it always so systematic?
Below is a brief overview of the home loan timeline in Australia. It puts into perspective the events that define Australian mortgages today, right from the beginning.
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The history of home loans in Australia began with the enactment of the Real Property Act 1862, first by Victoria, followed by other states.
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However, Australian property rights as we know them today were introduced a little later in 1886 in South Australia.
The Real Property Act 1886 aimed to identify and record ownership details of land or property to reduce the rate of fraud occurring at the time.
Australian banks operated under a free banking system even after the establishment of the Federal Reserve Bank of Australia in early 1881.
During this period there was substantial speculative demand in the real estate market. And the establishment of a large number of building societies and land banks began.
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The supply far exceeded the demand for the property. A direct result was the collapse of the Premier Permanent Building Association in December 1889, one of Melbourne’s largest building societies.
Finally, the failure of the Federal Reserve Bank in January 1893 made the banking crisis evident. By May of that year, eleven major commercial banks across the country had suspended transactions.
The failure of the Fed highlighted the need for a separate central bank to restore public confidence in the banking system. Thus, the Commonwealth Bank of Australia (CBA), a commercial bank established on 22 December 1911, obtained central bank authority in 1920.
It was the first bank to receive a federal government guarantee. The guarantee meant that the government took responsibility for insuring all bank deposits.
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As the central bank, it took over responsibility for issuing Australian banknotes from the Treasury Department.
In the 1990s, government revenue saw a severe decline, most economic sectors were doing well. As a result, there was a reduction in borrowing as well as government spending.
The recession worsened when most other nations fell into recession and foreign investment stopped flowing. Australian export demand has also fallen.
After the recession, as a tactic to avoid another recession, Australian government authorities implemented the following regulatory measures:
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The CommonWealth Bank (CBA) began to face criticism for operating as a central bank and commercial business at the same time.
So in 1960, the Australian government established the Reserve Bank of Australia (RBA), which took over the role of central bank.
Its insurance policies covered losses suffered by lenders if a borrower defaulted on their mortgage.
The insurance encouraged banks to be less strict with their lending criteria because even if the borrower defaulted, they got a reserve.
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Banks were doing the bare minimum to offer borrowers a better loan-to-value ratio (LVR) and competitive interest rates.
Non-bank lenders have started to grow in the market to offer borrowers better deals and packages. Banks lost their mortgage market share from 90% in the 1950s to 70% in the 1970s.
The establishment of the Mortgage Finance Association of Australia (MFAA) provided representation and accreditation to all operators in the mortgage industry.
The Australian government allowed foreign banks to enter the market. There has been increased competition in the mortgage industry.
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The removal of the separate classification of savings and trading banks provided the opportunity to expand the types of home loans from residential to commercial purposes.
Its primary function is to oversee and report on the actions of financial institutions, including banks and the mortgage industry as a whole.
Its task was also to set and enforce prudential standards and practices to ensure a competitive financial system.
Various lenders have offered a new range of products to meet the needs of those who could not meet the standard lending criteria.
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Lenders have also introduced new mortgage features such as withdrawal facilities, offset accounts and lines of credit so that borrowers can better manage their mortgages.
Also in 2001, the government established the Australian Securities and Investments Commission (ASIC). It regulates the corporate markets and financial services sectors in Australia.
Due to the US housing bubble that peaked in 2004 and rising home loan defaults, the GFC hit Australia in mid-2007.
Wholesale lenders were the most affected by the GFC as they would bring in funding from the international market to provide cheap interest rates.
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Their failure to offer competitive rates due to the global crisis meant borrowers saw no reason to choose them over the banks.
As a result, wholesale lenders’ market share fell from 13% in mid-2007 to around 2% in early 2009.
Major banks also bought some wholesale lenders. And thus, the banks’ market share increased from 60% to 80% in the two years.
Banks regaining market share and wholesalers losing it led to a sharp decline in dock loans. low and non-performing loans in 2011.
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The Australian government has started offering various grants and schemes to entice first home buyers to purchase a new property.
It then required each lender to lend investors no more than 10% per year of their total loan book.
The government began cracking down on foreign investors by increasing penalties for those who violated foreign investment rules.
Having closely monitored residential mortgage lending trends for over three years, APRA in 2017 concluded the presence of risky mortgage practice.
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It mandated all Australian Depository Institutions (ADIs) to set their interest-only loans at 30% of their book value.
In addition, it imposed stricter domestic limits on interest-only loans granted for loan-to-value ratios (LVRs) above 80%.
The big four banks have come under scrutiny for alleged wrongdoing such as benchmark interest rate rigging and mortgage fraud.
Thus, on December 14, 2017, the Royal Banking Commission was established. Its main function was to check any fraud in the banking, pensions and financial services industry.
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Following the establishment of the Banking Royal Commission, restrictions on interest-only lending and lenders moving away from subprime lending, it became harder to get mortgages.
In 2018, lenders, in order to bring their reputation back up to par, were setting stricter lending standards than in several years.
Home loan growth was clearly down, with 5.87% new loans granted in 2018, compared to 6.6% the previous year.
A substantial tightening of Australian mortgage lending standards has led APRA to raise the interest-only benchmark on 1 January 2019.
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Australian Depository Institutions (ADIs) were required to provide substantial assurances of improved credit standards to raise the benchmark.
The economic crisis caused by the Covid-19 pandemic began to show its effect on the Australian property market a little late.
It usually takes property prices to be affected by the impact of economic fluctuations, the reason being that houses are harder to buy and sell than stocks and bonds.
However, the economic crisis caught the mortgage market in the first quarters of 2020. As a result, initially there were mortgage defaults, repayments due, a decrease in home loans and a decrease in real estate prices. All this, mainly because of the skyrocketing unemployment rate.
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However, the Australian government and mortgage industry were quick to predict such changes and were therefore able to implement defensive measures fairly soon.
From the lenders’ point of view, for those who cannot make repayments due to the pandemic, mortgage deferment dates have been set.
It showed a total of $51 billion worth of loans for temporary repayment deferrals, which is about 1.9 percent of total outstanding loans.
In November 2020, the RBA cut official cash rates to a record low of 0.1%. Prior to this, the lowest the RBA had ever cut the cash rate was 1.5% in 2020.
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The direct impact on borrowers of low cash rates was that banks could now provide home loans at the lowest possible interest rates.
Due to the remote working experience and lack of space, the demand for more spacious accommodation has created a supply-demand imbalance.
As they plan to set higher rates next month, they’ve also started to slow down their lending altogether.
With many changes afoot, it would be interesting to see what turn of events the Australian home loan timeline will take in the coming days.
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