'A difficult day' for homeowners forced to find more mortgage money

When the country’s new Treasurer says it’s a difficult day for homeowners, you know things are serious.

“Just because it was expected that interest rates would go up it doesn't make it easier for homeowners who have to find the money to service their mortgage at the same time facing those sky rocketing cost-of-living prices, whether it be energy, grocery prices or other inflationary pressures in the economy,” Mr Chalmers said.

“It is a really difficult day, especially for homeowners who might have an especially big mortgage or who may not have built up the buffer others could do.”

“It’s a difficult day and a reminder and reflection of this serious inflation challenge that we have in the economy.”

If passed on in full by the banks, the biggest rate rise in 22 years and second in just over a month, will add $133 a month on a loan worth $500,000 over 25 years, and $265 a month on a loan worth $1 million.

As Aussie homeowners contend with the idea of trying to work and an extra half day or day, or cut back on spending, the banks are having no such issues.

Commonwealth Bank, Westpac, ANZ and National Australia Bank did not pass the rate rise on to most of its savings account holders.

RateCity research director, Sally Tindall, said it’s becoming a game of ‘Simon says’ among three of the big four banks.

“They’ve hiked in full for their variable rate borrowers, but they’ve passed nothing onto their savers as yet,” she said.

The four big banks will fatten their profits by a combined $10 billion over the next three years because of rising interest rates according to Kevin Young, President of Property Club, one of Australia’s largest independent property investment groups. 

Mr Young said that historically when interest rates rose, bank profits jumped. 

“When Australia’s had the highest interest rates in the developed world under Reserve Bank Governor, Glenn Stevens, the big four Australian banks were the most profitable in the world. 

“Over the coming three years we will see a huge transfer of wealth from mortgage holders to the big banks.”

Mortgage stress

Faced with rising living costs and looming interest rate increases, a concerning number of mortgage borrowers are on the brink of financial stress, according to new research by financial comparison site Canstar.

Canstar surveyed more than 900 mortgage borrowers to uncover how much their weekly living costs would need to rise to push them into financial stress. It found one-third are close to the edge, with 14 per cent already at their limit and 19 per cent saying a weekly increase in living costs of up to $100 would push them into financial stress. 

If weekly expenses rose by $101 to $200, a further 23 per cent of borrowers say they would feel the squeeze, while close to another third (34 per cent) say an increase of between $201 to $500 would push them over their limits. 

Canstar’s finance expert, Steve Mickenbecker said household incomes are falling far behind the cost of living at the petrol bowser, in the grocery trolley, and for insurance premiums.

“Households with a mortgage who are already at their limit will face dire financial stress when interest rates rise further.

“There is a whole generation of borrowers who have never seen an interest rate increase and who are feeling apprehensive about adding higher home loan repayments to their mounting living costs. 

“When the Reserve Bank lifts the cash rate for the first time since November 2010, existing borrowers with variable interest rate loans will also be feeling the pinch of monthly loan repayments.

“Borrowers have to expect multiple rate increases after the initial Reserve Bank move, historically six or eight increases over the ensuing couple of years, this time around adding 1.65 percent to 2.15 percent to their interest rate.”

Borrowers with larger loan sizes will feel the squeeze even tighter Mickenbecker said.

“With property prices moving up by as much as they have over the past couple of years, $1 million loans are anything but rare, they are almost the norm for more recent buyers.

“If the average variable rate rose by 1.65 per cent, the increase to monthly repayments on a $1 million dollar loan would be close to $940, or $217 extra per week.”

Honesty pays

While new research from CommBank has revealed the vast majority of Australian homeowners were preparing for an interest rate rise prior to the Reserve Bank’s decision, some borrowers may find their pants on fire.

So-called liar loans, in which borrowers make false representations on their loan applications, reportedly make up more than a third of applications.

These liar loans could indicate there is a higher level of risk in the market than the RBA is taking into account.

UBS research found that 37 per cent of borrowers who took out a home loan in the six months to December 2021 lied on the application. The same research found that for those who had taken out a loan with ANZ, more than half (55 per cent) had been less than honest.

Dr Angela Jackson from Impact Economics and Policy noted that, “the potential for a number of borrowers to borrow more than six times their income could be trouble if rates increase quickly and/or unemployment increases.”

That rates will rise quickly appears in little doubt.

APAC economist at Indeed, Callam Pickering, said rate hikes in both May and June are just a taste of what’s to come.

“Whether these rate hikes will work is the trillion-dollar question.

“Australia has imported high inflation from abroad and that is not typically a channel through which the RBA has tremendous influence.”

He said markets are pricing in a cash rate of 2.7 per cent by the end of the year.

“If the RBA hikes rates at a slower pace – which they almost certainly will – then the resulting depreciation of the Australian dollar will put upward pressure on inflation.”

According to CommBank research, more than 90 per cent of Australian home owners have taken steps to mitigate the impact of rising mortgage rates. Close to half (47 per cent) reduced their living costs, 42 per cent built up their savings, and almost two fifths (38 per cent) have been making additional repayments on their home loan to get ahead. The research also found that 37 per cent of Australians have been putting money into their offset/redraw account and a third (33 per cent) have been looking for cheaper providers for utilities/services.

Housing supply shortages

Real Estate Institute of Australia (REIA) President, Mr Hayden Groves, said the RBA’s second of a series of planned rate rises furthers the need for a holistic housing and rental supply solution for Australians.

He said the latest interest rate rise will lead to an overall reduction in housing affordability by around -2.4 per cent.

“The reality is that there is still a chronic undersupply of homes to both buy and rent across Australia so until this is addressed – including dealing with the construction backlog for new homes – we are unlikely to see any drastic shifts in response to the RBA’s rates rise agenda,” he said.

“In general, this is likely to play in the market by stabilising house price growth and sustained low vacancy rates and return to a new normal rather than the catastrophic reductions as some property commentators suggest.

“Certainly, transaction numbers are likely to abate as we move through this cycle.”

Mr Groves said the rise in interest rates reiterates the urgent need for a national plan that addresses housing affordability and supply which has been committed to by the Albanese Government.

“The National Plan for Housing is badly needed to address the complex fiscal and monetary conditions Australians are being subjected to that deals with the fundamentals of housing supply,” he said.

“Australians are relying on this as the proportion of median income required to meet mortgage repayments will rise by 6.2 per cent if the cash rate hits 2 per cent.”