Commonwealth Bank issues a warning to mortgage holders
Australian home borrowers could be forced to sell their homes if interest rates continue to rise and it becomes more difficult for them to pay off their loans, a new study finds.
Financial comparison group Finder estimates that 145,000 homeowners, or about five percent of people with a mortgage, would be in this situation if interest rates rose by three percentage points.
Home loan expert Richard Whitten said more rate hikes to curb rising inflation would force struggling borrowers to sell in a slowing housing market.
“After yet another hike in cash rates, mortgage repayments are higher for many borrowers than they were a few months ago and are likely to get even higher this year,” he said.
“Through the rest of 2022, many homeowners with variable rates will have a harder time and we will probably see the number of defaults rise.”
Borrowers in May, June, July and August have already weathered 1.75 percentage points of the Reserve Bank’s rate hikes, the strongest increases since 1994.
Australian home borrowers could be forced to sell their homes if interest rates continue to rise and it becomes more difficult for them to pay off their loan, a new study finds (pictured is an auction in Melbourne)
The ANZ bank expects the spot rate, now at its six-year high of 1.85 percent, to reach a ten-year high of 3.35 percent in November, with bigger rate hikes of 0.5 percentage points in September. , October and on Melbourne Cup day.
This would mean borrowers would have absorbed the 3.25 percentage point rate hikes in just six months, with the RBA ending the era of the record-low cash interest rate of 0.1 percent in May.
If that prediction comes true, a borrower with an average mortgage of $600,000 would pay $1,060 more each month on their repayments compared to May.
This borrower would owe $3,366 each month, compared to $2,306 in May.
Since November last year, banks have been required to assess a borrower’s ability to cope with a three percentage point rise in mortgage rates, under Australian Prudential Regulation Authority rules.
ANZ and Westpac expect the Reserve Bank to stop tightening monetary policy once the spot rate hits 3.35 percent, but the 30-day interbank futures market expects a spot rate of 3.7 percent by April 2023.
Financial comparison group Finder estimates that 145,000 homeowners, or about five percent of people with a mortgage, would be in this situation if interest rates rose by three percentage points (Melbourne homes pictured)
The Finder survey of 308 Australians with home loans found that 48 percent would have to cut spending, while 14 percent would struggle to pay their mortgages and bills.
The five percent who feared they would have to sell their home were estimated to be 145,000 mortgagees.
Those who find themselves in this situation would be forced to do so in a declining market, leaving them in a situation known as negative equity, where a borrower owed more than their home was worth.
The Commonwealth Bank, Australia’s largest mortgage lender, expects national house prices to fall by 15 percent by 2023.
The banks are now much stricter on borrowers with debt-to-income ratios of six or more, the level that APRA considers risky.
Australians who borrow the maximum amount allowed are now being advised to forgo having a credit card.
Credit rating agency Moody’s Investors Service said stricter rules are needed to reduce the risk of late payments when a borrower is 30 days or more behind in paying off their mortgage.
“Stronger credit quality will reduce the heightened risks of default as interest rates and inflation rise,” it said.
ANZ and Westpac expect the Reserve Bank to stop tightening monetary policy once the spot rate hits 3.35 percent, but the 30-day interbank futures market (Australian Securities Exchange chart, pictured) expects a spot rate by April 2023. interest of 3.7 percent
Moody’s said the default rate is likely “to rise moderately through the remainder of this year as rising interest rates and higher living costs weigh on borrowers’ ability to repay debt.”
But the rating agency calculated average default rates of two to four percent over the past five years for non-compliant loans, with lending criteria not as strict as the major banks.
Inflation rose 6.1 percent in the year to June, the fastest pace since 1990, when the one-off effect of the introduction of the GST in 2000 and 2001 was removed.
Both the Treasury Department and the Reserve Bank expect headline inflation — also known as the consumer price index — to hit a new 32-year high of 7.75 percent by the end of 2022.
What borrowers could pay each month in November compared to May?
$500,000: $883 up from $1,922 to $2,805
$600,000: $1,060 up from $2,306 to $3,366
$700,000: $1,236 up from $2,691 to $3,927
$800,000: $1,413 up from $3,075 to $4,488
$900,000: $1,590 up from $3,459 to $5,049
$1,000,000: $1,767 up from $3,843 to $5,610
Calculations based on spot interest rising from a record low of 0.1 percent in May to 3.35 percent in November, as forecast by ANZ. Monthly repayments based on a popular Commonwealth Bank variable rate hike from 2.29 percent to a projected 5.39 percent