Output Group 1.2: Home Ownership
IBA aims to provide an affordable entry into home ownership for Indigenous people, particularly those on lower incomes. The Home Ownership Program is focused on first home buyers who have difficulty obtaining home loan finance from mainstream commercial lenders. The program’s success is assessed in terms of increasing Indigenous home ownership rates so that they are closer to that of the wider Australian community. (FaHCSIA Portfolio Budget Statements 2008–09)
Overview
In Australia, home ownership is recognised as the foundation for social and economic wellbeing. It is a major factor in family stability and a means of intergenerational wealth transfer, but many Indigenous people do not qualify for loans from mainstream home loan providers. Approximately 86 per cent of Indigenous people who obtained a home loan from IBA in 2008–09 had a loan-to-value ratio greater than 80 per cent, the threshold which may attract a higher interest rate and loan mortgage insurance from mainstream lenders.
IBA facilitates home ownership for Indigenous Australians on lower incomes by providing them with affordable home loan products. The Home Ownership Program focuses on assisting first home buyers and families with high-priority needs. The program’s eligibility policy encourages alternative pathways to home finance for higher income earners.
The Home Ownership Program, which is one of the most successful and enduring Indigenous-specific programs, contributes to closing the significant gap in the home ownership participation rates of Indigenous and non-Indigenous Australians.
Since its establishment in 1975, the program has lent more than $1.39 billion and helped more than 13,740 families participate in home ownership. IBA’s local service delivery units develop and maintain supportive relationships with Indigenous clients, based on trust and respect, during the home ownership process. IBA’s supportive relationships with its home loan clients distinguish it from mainstream lenders. Research into perceptions of home ownership among IBA home loan clients was published by the Centre for Appropriate Technology in June 2008. It reported:
‘Respondents described close working relationships with IBA staff, many of whom were Indigenous and known to them. The low interest rate and deposit were obviously attractive, but so too was the flexibility and safety net provided through a case management approach.’
Demand for IBA’s home loans continued to grow throughout 2008–09. At year’s end, 1,323 eligible applicants were waiting to receive an invitation to apply for a home loan, a net increase of 45 per cent on the previous year. The larger waiting list for IBA home loans in 2008–09 resulted from factors such as the tightening of credit by mainstream lenders, particularly in terms of the loans to valuation ratio and the accelerated growth in demand arising from the increased First Home Owner Grant. Other ongoing factors such as the increasing average price of homes meant that IBA’s limited capital could assist fewer borrowers. Therefore, IBA has been working closely with mainstream lenders to reduce the waiting list. IBA has amended its home ownership policy. It will now require some applicants to source some or all of their funding from another lender. IBA continues to explore other options to meet the growing demand for its loans. A consequence of this backlog is that waiting periods for new eligible applicants joining the list in 2009–10 may extend to more than 12 months.
The global financial crisis presented new challenges for the program in 2008–09. Although the trend to lower interest rates assisted borrowers in stable or secure employment, the economic downturn affected others, especially those residing and working in some regional and more remote areas where the incidence of mortgage stress and financial hardship is increasing.
Performance
IBA exceeded the performance indicators published in the 2008–09 FaHCSIA Portfolio Budget Statements (Table 5).
| Key performance indicators | 2008–09 target | 2008–09 results | |
|---|---|---|---|
| a IBA’s tier 1 income amount is equivalent to 125% of the national average weekly male earnings as calculated by the Australian Bureau of Statistics. | |||
| Reportable arrears | Less than 0.20% of portfolio balance | 0.03% of portfolio balance | |
| Number of loans to applicants who have an adjusted combined gross monthly income which is less than IBA’s tier 1 income amounta | 75% of loans | 86% of loans | |
| Number of loans to applicants who are first home buyers | 70% of loans | 90% of loans | |
Social and economic objectives
Research into the perceptions of home ownership among IBA home loan clients published by the Centre for Appropriate Technology in 2008 confirmed that the Home Ownership Program’s social and economic objectives are being met and that the program is having a real impact on the quality of life of a growing number of Indigenous Australians. Overall the research identified no home ownership regrets, with clients placing a high importance on the family’s social and emotional wellbeing, expressed in terms of happiness, security, pride and a sense of achievement.
The Steering Committee for the Review of Government Service Provision, in the Productivity Commission report Overcoming Indigenous disadvantage: key indicators 2009, identified a number of key home ownership messages. The report commented that home ownership is a key indicator of wealth and saving and provides a secure asset base that can contribute to financial stability and against which people can borrow. A home can be passed from one generation to another and provides security of tenure, which is not always available with rental housing. Home ownership also allows households to build or modify a dwelling to suit their particular needs. The report also indicated that:
- the increase in home ownership among Indigenous people reflected similar increases in employment and income
- Indigenous people were sharing in Australia’s general prosperity.
Funding
Funding for the Home Ownership Program is derived from repayments received from borrowers as loans are repaid and discharged in full. In recent years, the program has also benefited from capital injections from the Australian Government and funding from IBA. The number of loans that can be approved is limited to the revenue received from repayments, interest and capital injections (Figure 9).
Figure 9: Loan approvals and repayments, by amount, 2000 to 2009
Loans
Loan applications are assessed on the client’s servicing capacity, credit history, family income and an independent property valuation. Loans are secured by a registered mortgage.
The program ensures that IBA’s substantial investment in home lending is protected by:
- determining loan affordability based on a detailed assessment of the applicant’s circumstances
- having its well-trained staff help borrowers with ongoing loan management and aspects of home ownership.
Lending criteria
IBA has standard lending criteria for assessing applications for loans to purchase or construct houses on freehold land (Table 6).
| Criterion | Detail |
|---|---|
| a The IBA income amount is equivalent to 100% of the national average weekly male earnings as calculated by the Australian Bureau of Statistics. | |
| Loan purpose | For the purchase or construction of standard owner-occupied homes or for the purchase of residential land on which to build a home |
| Income limits | Up to 125% of the IBA income amounta if borrowing the balance of the purchase price |
| Over 125% and up to 150% of the IBA income amount if borrowing 60% or less of the purchase price | |
| Up to 225% of the IBA income amount if borrowing 20% or less of the purchase price | |
| Purchase price limits | Based on purchase price limits set periodically as a proportion of the Real Estate Institute of Australia median capital city sale price |
| Deposit | $3,000 or 5% of the purchase price, but sometimes less, depending on circumstances (the First Home Owner Grant may be used to meet deposit requirements) |
| Interest rates | Generally commence at 4.0%, gradually increasing until they reach the IBA home loan rate, currently capped at 1% below market interest rates for owner-occupied homes |
| Loan terms | Up to 32 years, determined by the borrower’s ability to meet loan repayments and, in certain circumstances, extended to 45 years (the average loan life is seven years, which is similar to that in the regulated home loan market) |
Delwyn Williams and her family at their home in Cairns
Support for borrowers
IBA’s home loan staff promote home ownership in local communities and help eligible clients by providing local loan assessment and management support services. Where appropriate, they also assist prospective home buyers to access finance from the private sector and state and territory home ownership assistance schemes.
In 2008–09, IBA extended its home lending support capacity by placing a dedicated home lender in its Cairns office. This office also now supports the Home Ownership on Indigenous Land Program and has assumed responsibility for providing IBA’s standard home loans in the region.
IBA also strengthened its local support operations in response to the difficulties faced by borrowers experiencing mortgage stress or financial hardship due to the general economic downturn.
New lending
In 2008–09, IBA approved 348 new loans, with a total value of $86.8 million (Table 7 and Figure 10), which was in line with program revenue received from loan repayments and loan discharges.
In 2008–09, approximately 86 per cent of borrowers had an adjusted household income of less than 125 per cent of the national average male earnings ($77,779).
On a state and territory basis, regional offices in New South Wales and Queensland approved the greatest proportion (60 per cent) of loans. The number of loans approved in those states corresponds to the number of enquiries received (68 per cent) and is broadly in line with the concentration of the Indigenous population in them.
| Regional office | Loans approved (number) |
Loans approved (total value, $m) |
Loans below 125% of IBA’s tier 1 income amounta |
|---|---|---|---|
| a The IBA tier 1 income amount is equivalent to 125% of the national average weekly male earnings as calculated by the Australian Bureau of Statistics.
Note: Amounts for total value of loans approved have been rounded, so the sum does not total. The total is the rounded sum of unrounded amounts. |
|||
| Adelaide | 8 | 2.4 | 8 |
| Alice Springs | 10 | 2.5 | 7 |
| Brisbane | 45 | 12.7 | 38 |
| Broome | 6 | 1.2 | 2 |
| Canberra | 7 | 2.1 | 5 |
| Coffs Harbour | 37 | 9.6 | 36 |
| Darwin | 31 | 10.4 | 22 |
| Hobart | 9 | 1.7 | 9 |
| Melbourne | 44 | 10.8 | 42 |
| Perth | 26 | 7.0 | 21 |
| Rockhampton | 17 | 4.1 | 15 |
| Sydney | 33 | 9.0 | 25 |
| Tamworth | 16 | 2.5 | 16 |
| Townsville | 27 | 5.7 | 24 |
| Wagga Wagga | 32 | 4.7 | 29 |
| Total | 348 | 86.8 | 299 |
The average value of the loans to borrowers in each centre varied in line with the average cost of housing in each centre and ranged from $160,000 in Tamworth to $338,000 in Darwin. The average value of loans nationally was $258,210, an increase of approximately $18,000 over 2007–08. This figure includes adjusted funding to loans approved in previous financial years. This clearly reduces the number of loans that can be written when values increase and the revenue base remains steady or goes into decline.
As in previous years, the main reason for not approving a loan application was that the applicant had committed a significant amount of current income to existing consumer debt repayments, making a home loan unaffordable.
Figure 10: Number and value of loans approved, 2000 to 2009
Figure 11: New loans approved and enquiries received, by jurisdiction, 2008–09
As can be seen from Figure 11, the number of loans approved in Queensland and New South Wales (60 per cent) corresponds to the number of enquiries received in these states (68 per cent) and is broadly in line with the population in them. A large proportion of those who made new enquiries lodged a request to join IBA’s waiting list of applicants wishing to apply for a home loan.
Average loan amount: There has been a continuation of the upward trend in the average loan amount IBA borrowers need to purchase a home as a result of the steady increase in house prices over 10 years (Figure 12). The average loan amount in 2008–09 was $258,210, up 7 per cent from $240,300 in 2007–08. The average loan amount represents adjusted funding to loans approved in previous financial years.
Figure 12: Average loan amount, 2000 to 2009
Loans to tenants of Indigenous housing organisations: In 2008–09, IBA lent a total of $1.24 million to 12 tenants of Indigenous housing organisations to buy homes.
Deposit gap loans: Finance providers generally require clients who are borrowing more than 80 per cent of the property purchase price to take out expensive loan mortgage insurance. Deposit gap loans fund up to 20 per cent of the purchase price of a home, with the remainder of the required funds sourced from the private sector home finance market. With deposit gap loans, IBA takes second priority in the ranking of its registered mortgage, allowing mainstream lenders to offer more favourable terms to customers by not requiring them to take out mortgage insurance. In 2008–09, IBA approved 21 deposit gap loans totalling $3.21 million, a 132 per cent increase in the total amount of deposit gap lending over the previous year (2007–08: 21 loans, totalling $1.38 million). This is a significant part of IBA’s strategy to increase the level of private sector financing of Indigenous home loans. We expect it will help some of those on the waiting list to opt for an alternative which provides the same outcome; that is, home ownership.
Loans for renovations and extensions: IBA provided a range of small loans to eligible clients for modest renovations, extensions, repairs or maintenance to:
- maintain homes in good order or prevent harm to occupants
- accommodate new family members or members with particular medical or health requirements
- improve standards of living (for example, by installing heating and cooling systems).
In 2008–09, IBA approved five loans, totalling $0.17 million, for renovations, extensions, repairs or maintenance. This was a 39 per cent decrease on the nine loans, totalling $0.28 million, made in 2007–08 for those purposes.
Portfolio profile and management
IBA’s Home Ownership Program stands apart from mainstream home loan financiers by providing an entry point into home ownership for Australian society’s most disadvantaged group of people.
The program’s lending policy and eligibility criteria target high-need applicants on low incomes seeking to obtain basic, affordable loan products. IBA’s local service delivery network provides supportive relationships to help structure loans to suit individual Indigenous customers.
In 2008–09, over 86 per cent of loans were made to applicants who had an adjusted combined gross monthly income that was less than IBA’s tier 1 income amount ($74,779), which meant that more than 90 per cent of the program’s new lending was provided to first home buyers.
Geographic distribution
IBA makes loans for home purchases in metropolitan and non-metropolitan areas, with a greater proportion of loans made for purchases in non-metropolitan areas. The geographic distribution of IBA’s home loan portfolio aligns with the December 2008 Australia Simple Average in Standard & Poor’s Australian RMBS (residential mortgage-backed securities) Performance Watch Report (Figure 13).
Figure 13: Portfolio comparison, IBA and mainstream lenders,
by geographic distribution
Loan-to-value ratio
IBA’s Home Ownership Program complements the lending products of mainstream lenders. IBA’s home loans meet the higher borrowing requirements of Indigenous applicants who generally lack the capacity to save a substantial deposit. Most IBA home loans have a loan-to-value ratio of more than 80 per cent (92.7 per cent in 2008–09), which is higher than that of other Australian lenders, based on the December 2008 Australia Simple Average in Standard & Poor’s Australian RMBS Performance Watch Report (Figure 14). This demonstrates that the Home Ownership Program fills a unique niche in the home loan market.
Figure 14: Loan-to-value ratio, IBA and mainstream lenders
Arrears management
Appropriate, supportive and workable arrears management arrangements are the cornerstone of the Home Ownership Program’s loan after-care role. In 2008–09 there was a further reduction in overall reportable arrears.
Over the past 10 years, the growth in the total value of the portfolio has been accompanied by a decline in the total value of loan arrears (Figure 15).
Figure 15: Portfolio growth and arrears decline, 2000 to 2009
IBA arrears compare favourably with the December 2008 Australia Simple Average in Standard & Poor’s Australian RMBS Performance Watch Report (Figure 16).
Figure 16: Arrears comparison, IBA and mainstream lenders
Loan discharges
Mortgage securities are discharged for three main reasons: the sale of the security property, refinancing with another lender, and full repayment of the loan. Over the past five years, the average home loan term has been consistently less than eight years (Figure 17). The value of loan discharges peaked in 2006, but declined by more than 20 per cent during 2007 and 2008, and by a further 8 per cent in 2008–09. This decline occurred because mainstream home lenders became more risk averse in their lending decisions as a consequence of the global financial crisis and because existing borrowers became increasingly concerned about their employment or income security.
Figure 17: Loan discharges by year of early settlement, 2000 to 2009
In 2008–09, IBA sold five houses under its mortgagee-in-possession powers. The average mortgage default amount was $5,053. All five properties were voluntarily surrendered to IBA and marketed for sale by private treaty or public auction on the open market. Three of the properties sold for less than the balance owing. For one of these loans, the residual balance is being repaid by the borrower under an instalment arrangement and the two others loans are each the subject of a discharge of mortgage insurance claim.
Outlook
The 2009–10 FaHCSIA Portfolio Budget Statements targets shown in Table 8 will guide IBA’s performance in the next financial year.
| Key performance indicators | 2009–10 target |
|---|---|
| a IBA’s tier 1 income amount is equivalent to 125% of the national average weekly male earnings as calculated by the Australian Bureau of Statistics. | |
| Number of loans to applicants who have an adjusted combined gross monthly income of not more than 125% of IBA’s income amounta | 75% of loans |
| Number of loans to applicants who are first home buyers | 75% of loans |
The growing waiting list of eligible applicants seeking home loan finance from IBA continues to outstrip the limited funds available to the Home Ownership Program for new lending. In May 2009, the Board determined that in 2009–10 the lending policy would be strengthened to further ration the available revenue derived by the program primarily from principal and interest loan repayments and early loan discharges. New lending will be provided only for amounts that borrowers cannot obtain from a mainstream lender. Split loans with other lenders are expected to become more common.
For the Australian financial sector, the year ahead is expected to be marked by continuing uncertainty flowing from the global financial crisis, with growth in unemployment and job losses predicted. The challenge for IBA will be to work supportively with customers experiencing mortgage stress or financial hardship to ensure that they are assisted wherever practicable.