The Australians most at risk of mortgage stress as Reserve Bank interest rates keep rising

Australians who took out a loan when Reserve Bank interest rates were still at a record low of 0.1 per cent are most at risk of mortgage stress as house prices are expected to continue falling into September.

Monthly repayments on a variable mortgage are up 42 percent since May 2022, when the RBA began the first of its nine rate hikes.

Westpac, ANZ and NAB expect three more hikes in March, April and May that would take Reserve Bank cash rates to an 11-year high of 4.1 percent – up from 3.35 percent today.

This means Australians with an average $600,000 mortgage will see their monthly repayments rise by a further $283 to $3,567 – a 54.7 per cent increase in just one year.

A variable rate from the Commonwealth Bank in May would rise to 5.92 percent from 5.17 percent now before the next rate hike, expected on March 7.

Just 10 months ago, Australia’s largest mortgage lender was offering variable rates as low as 2.29 per cent for borrowers with a 20 per cent down payment.

AMP senior economist Diana Mousina said borrowers who took out a loan between 2020 and early 2022 — when RBA rates were at a record low of 0.1 percent — were most at risk of mortgage stress where they struggled to pay their bills.

“These households have not had time to build prepayment buffers, have experienced major house price falls, have experienced very rapid mortgage rate repricing, are likely to have taken on larger loans, and are unlikely to have been stress tested for the current increase in the mortgage interest deduction. interest rates,” she said.

Australian household debt also makes up 189 percent of income, a level higher than Canada, the UK, the United States, Germany and New Zealand.

“This leaves Australian households vulnerable to changes in house prices and interest rates, with the risk of mortgage stress increasing as house prices fall and interest rates rise,” Ms Mousina said.

Ms Mousina argued that mortgage stress should be based on more than just who spent more than 30 percent of their income on mortgage payments.

She also looked at delinquent mortgages, where a borrower is 30 days or more behind on their payments, along with negative equity, where someone owes their bank more than their home is worth.

Sydney has been the hardest-hit capital city with the average house price falling 14.7 percent in the year to February 2023 to $1,217,308, data from CoreLogic showed.

Hobart equivalent values ​​are down 12.2 percent to $699,959.

But the expensive lifestyle zip codes on New South Wales’s far north coast have suffered the biggest annual declines since flooding hit the area in early 2022.

Mullumbimby’s median house price is down 30.1 percent to $1,011,547.

This was even more dramatic than Byron Bay’s 25.4 percent drop, which pushed the median home price back to $2,255,105.

Lismore suffered the worst of the flood devastation with the median home price falling 24.8 percent to $403,430.

Another flood-affected Brisbane suburb, Rocklea, saw the median home price drop 13.3 percent to $507,506.

CoreLogic economist Kaytlin Ezzy said property prices in the flood-prone suburbs of Brisbane and northern NSW are likely to take longer to recover compared to the aftermath of the 2011 floods.

“Given the severity of this event and the short time frame between major floods, it is likely that the current declines in values ​​across the northern rivers and affected Brisbane housing suburbs may be more sustainable,” she said.

AMP expects house prices in Australia to continue falling through September, representing a 15 to 20 percent drop from 2022 peaks.

They are down 9 percent since peaking in April 2022, marking the largest decline in CoreLogic records dating back to 1980.

The Reserve Bank expects 880,000 fixed-rate mortgages to mature by 2023.

That means that a borrower who has taken out an average fixed interest rate from the major bank of 1.92 percent in May 2021 must switch to a variable interest rate of 7.43 percent.

The fine print in these contracts stipulated that borrowers would move to a floating rate that averaged 3.33 percentage points above the RBA money rate – and three of Australia’s Big Four banks expect 4.1 percent money rates by May.

That means a borrower with an average mortgage of $600,000, over 25 years, would abruptly go from paying $2,518 a month to $4,251 — a massive 68.8 percent increase, RateCity calculated.

AMP chief economist Shane Oliver said a higher RBA cash rate of 4.1 per cent threatened to push Australia into recession as more home borrowers struggled to pay off their mortgages, leading to falling home prices.

“The rising risk of a recession with much higher unemployment will weigh on demand, with the risk that debt servicing problems for some homeowners will also boost supply,” he said.

Australia’s gross domestic product grew 0.5 percent in the December quarter, but GDP per capita — or economic output for each individual — remained flat, the Australian Bureau of Statistics’ National Accounts showed .

Gareth Aird, Commonwealth Bank’s head of Australia’s economy, said the economy is likely to suffer a per-capita recession in 2023, despite the return of immigrants.

A per capita recession is different from a technical recession – defined as two consecutive quarters of GDP contraction.

Australia last experienced a technical recession in 1991 due to high interest rates.