Investors fuel mortgage competition while affordability hits record lows

Competition is intensifying across the housing market, as investors and homebuyers jostle for limited stock and lenders skirmish for a slice of the action.

New analysis from S&P Global Ratings and Cotality shows investors are fuelling stronger mortgage competition as buying and renting become more unaffordable than ever. 

While a continued pause of the Reserve Bank of Australia (RBA) cash rate could limit home loan arrears, it likely won’t cool demand for mortgage products, the ratings agency found.

Demand for mortgages typically mirrors demand for property, with heightened competition pushing house prices upward and affordability downward.

It comes as property investors make their mark in the market, accounting for two in five new home loans written in the September quarter.

“Investors are less sensitive to interest rate movements, given their often-higher income levels and existing property footprint,” S&P Global credit analyst Erin Kitson said.

“This makes them a formidable competitor to prospective first home owners, who increasingly need to take on more debt to participate in home ownership.”

Perhaps in a bid to scoop up larger slices of the investor mortgage market, lenders appear to be minimising the gap between variable rates offered to owner occupiers versus investors.

The difference between investor and owner-occupier variable rates on new loans was just 18 basis points in August – a proportional gap of 3.27%, the lowest on record.

Lenders may also be drawn to the investor market by its lower levels of mortgage arrears.

As of September, arrears sat at 0.62% for investors compared to 1.01% for owner-occupiers, likely reflecting investors’ typically stronger servicing capacity and higher use of interest only loans, which reduce the size of repayments.

However, increased investor participation is putting additional strain on first home buyers, homeowners, and renters.

Cotality’s latest Housing Affordability Report, released on Tuesday, found three of four key affordability metrics – dwelling price-to-income ratios, years to save a deposit, and percentage of income needed to meet rent – are at all-time highs.

Additionally, the three RBA rate cuts handed down in 2025 haven’t significantly eased the strain for new mortgage holders.

A new home loan still demands 45% of the median household income, assuming a person buys a median priced home with a 20% deposit.

_{Source: Cotality, ANU}

“The past five years combined extraordinary demand drivers with supply constraints, creating an extraordinary boom in both home values and rents,” Cotality head of research Eliza Owen said.

“Australian home values have climbed roughly 47.3% since March 2020, an extraordinary rise that added about $280,000 to the median dwelling value.”

Affordability challenges aren’t restricted to the capital cities, though Sydney remains the toughest market for buyers and conditions in Adelaide, Brisbane and Perth have deteriorated the fastest.

An uptick in remote work and regional migration has seen similar affordability concerns intrude on regional markets.

And while the expanded 5% Deposit Scheme will enable more first-time buyers to enter the market with a smaller deposit, their additional demand is likely to push prices higher, S&P Global notes.

Domain senior economist Joel Bowman recently told the Savings Tip Jar podcast that the uptick in investor lending could be a sign investors anticipate the same phenomenon.

“I think some investors have been quite on the money, wanting to get in ahead of those first-time buyers [newly able to access the 5% Deposit Scheme],” Dr Bowman said.

Around one in 10 homes purchased in October – the maiden month of the scheme’s expansion – were snapped up by buyers turning to the 5% Deposit Scheme.

Close to 6,000 homes were bought via the scheme that month, up from close to 4,000 in October 2024.

In addition to potentially increasing house prices, the scheme’s expansion could also see an uptick in high loan-to-value ratio (LVR) lending, S&P Global warns.

It comes after Westpac’s latest Home Ownership Report found more than half of Gen Zs hoping to purchase a home were aiming to do so with a deposit of 10% or less, compared to an average intended deposit of 17.5% among all wishful first home buyers.

While an uptick in higher LVR lending may raise questions for the Australian Prudential Regulation Authority (APRA), Dr Bowman does not expect the regulator to revive its earlier macroprudential clampdowns.

“APRA is very mindful that these lower interest rates can lead to riskier lending and, as a result, they’re engaging and working with banks and different macroprudential tools to help manage some of those risks, including high debt-to-income lending, or caps on new investors or interest only loans,” he said.

“However, I suspect that the case to implement such changes this time around is a little bit less compared to 2014 and 2018 – in particular, I think the financial stability case is less clear.

“High debt to income lending has shifted lower since 2022 and has remained at those low levels since … borrowers with cash flow shortages remain low and have been declining as well, and arrears rates are low, very low.”

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_{Image by Jay Wennington on Unsplash}