Lenders become more cautious in resource towns

Lenders become more cautious in resource towns

Posted on Thursday, September 20 2012 at 1:12 PM

Some financiers have this month reviewed risk ratings of mining towns, meaning that investors are likely to need larger then average deposits to purchase in these areas, according to finance experts.

With the many recent announcements of deferred
resource projects and blanket statements from politicians and mining moguls
about the state of the sector, it’s not only investors feeling uneasy about
borrowing to buy in resource towns at the moment, but also some lenders,
according to Michelle Hutchison of RateCity.com.au.

Hutchison has noticed some lenders reviewing their
lending criteria for certain areas they feel are higher risk.

“For instance, Police and Nurses Mutual Banking
(formerly Police and Nurses Credit Union), which is based in Perth, has dropped
some of its home loan loan-to-value ratios from 95 per cent to 90 per cent this
month. This means borrowers need a minimum 10 per cent deposit as opposed to
five per cent previously for some of their home loans.”

Lenders that are adjusting their lending criteria are
likely to be looking at mining areas where property values have escalated
recently and are concerned that if property values drop suddenly their
borrowers will be faced with negative equity, adds Hutchison.

“So increasing the minimum deposits provides greater
security for both lender and borrower when investing in mining towns.”

Based on recent conversations with her franchise
owners located in and around resource towns, Belinda Williamson of Mortgage
Choice says often smaller towns don’t have enough available property stock to
support growing mines, so to house the increase in local population, new
properties must be built.

“The cost to buy land to build on may be less
expensive than in regional or metro areas, however the cost to build is often
much higher, pushing up new property prices in the area,” she says.

“This is a concern to property buyers, particularly
those who have deposits of less than 20 per cent of the property’s value and
are in need of lenders mortgage insurance (charged by a lender when property
buyers wish to borrow more than 80 per cent of a property’s value) to get them
over the line.”

Williamson says many mortgage insurers haven’t adapted
to boom cycles in mining towns, possibly due to the unsustainable nature of
higher property prices in these markets given the expectation that if or when
the mine dries up, property demand will ease and prices will fall.

“The mortgage insurers have capped amounts on what
they’re willing to insure and often the amount is considerably less in smaller,
regional areas including mining towns. 

“With a shortage of available stock it’s also assumed
that the rental vacancy rate would be low and that rental income to investors
would be high.”

She adds that lenders may choose to factor in a more
sustainable, long-term rental income when determining a borrower’s ability to
service a loan.

“For example, if a property is rented in a mining town
for say $2000 per month, property valuers may note this but advise that a
realistic expectation of long-term rental income is more likely to be $1500 per
week. A lender would then only take into consideration the lower rental
income,” she says.

“Another factor when determining loan serviceability
is the percentage of rental income taken into consideration. In most metro or
regional areas, lenders will take into consideration 80 per cent of the rental
income when considering a borrower’s ability to service a loan. However, we
have heard of some instances, particularly in mining towns, where some lenders
have reduced this to 60 per cent.”

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