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Mortgage stress, sector optimism, borrower confusion amid interest rate rises

Borrowers facing increased loan repayments are stressed and refinancing in record numbers, but the time to secure fixed rate home loans may have passed.

Young woman with hands on head appears stressed about her mortgage statement.
The latest interest rate hike will likely plunge another 200,000 households into mortgage stress.

The financial crunch of three consecutive monthly interest rate increases by the Reserve Bank of Australia (RBA), and subsequently lenders, has sent record numbers of borrowers scurrying to refinance.

Around one in five mortgage holders have refinanced their home loan in the past six months, with the same proportion (18 per cent) saying they plan to do so in the coming six months.

The total value of refinanced loans reached a benchmark high of $19 billion in May – an increase of 20 per cent over the year, according to Finder analysis of the latest Australian Bureau of Statistics (ABS) data released this week.

Refinancing in search of more competitive lending deals is wise but also raises a conundrum for strategising borrowers.

Mortgage holders considering fixing their home loan interest rate at the current rates on offer may need to think twice before doing so, according to and Zippy Financial Director and Principal Broker Louisa Sanghera, who argued the current fixed rate offerings are often significantly higher than variable home loan rates.

“Borrowers may lose out over the long-term if rates didn’t peak above their fixed rate mortgages,” Ms Sanghera said.

“Anyone wanting to fix the rates on their mortgages ideally should have done so last year when rates were in the one to two per cent range.

“Fixed rates are already in the four to six per cent range, depending on the fixed loan term, which is generally well above the current variable option in most cases – even after the three successive cash rate increases.”

Sarah Megginson, senior editor of money at Finder, also said it was too late to fix a home loan, with most fixed interest rates above 5 per cent.

“For some, it’s a case of refinance or default on their debt.

“Households are in a very precarious position right now struggling with the worst cost of living crisis in decades,” Ms Megginson said.

  Cash rate Average home loan rate* Average monthly repayment Average annual repayment Average annual increase
April 2022 0.10% 3.45% $2,727 $32,728 -
July 2022 (current rate as of 5 July) 1.35% 4.65% $3,151 $37,816 $5,088
2.50% (predicted peak) 2.50% 5.10% $3,318 $39,819 $7,091

Source: Finder, RBA. *Owner-occupier variable discounted rate. Repayments based on the average loan of $611,158 (ABS data analysed by Finder). Predicted average home loan rate of 5.10% is based on historical RBA data.

Worryingly, 17 per cent of mortgage holders ‘have no idea’ what their home loan interest rate is. A further 45 per cent only have a general idea what interest rate they are paying.

Ms Megginson said interest rate increases usually came with a 30-day grace period – giving mortgage holders time to assess their options.

“There’s still a lot of competition in the home loan market and you could save hundreds every month by moving to a lender with a cheaper rate.”

The average home loan in Australia in April was $615,304, according to Australian Bureau of Statistics data.

The average homeowner who isn’t on a fixed rate will see their monthly repayments jump by $424 compared to what they were paying in April this year. That’s a staggering $5,088 more per year.

Megginson urged Aussies to shop around for more competitive interest rates with smaller lenders offering some of the cheapest rates.

While the so-called Big Four banks dominate the lending landscape, there are more than 100 other lenders in Australia.

“There’s not likely to be any reprieve for the next couple of years.”

Stressed out borrowers

The RBA’s rapid ascent from an official cash rate of 0.10 per cent to 1.35 per cent, it’s highest level since May 2019, has plunged many Australians into financial trouble.

The common definition of mortgage stress is any mortgage holder that is using above 30 per cent of their income on mortgage repayments and principal of Digital Finance Analytics, Martin North, estimates the figure at about 1.69 million households before the latest rise. He said around 200,000 more households will now likely find themselves in that situation.

Areas with the most households likely to be in mortgage stress include Melbourne’s south-east, Queensland’s Toowoomba region, Mount Annan in south-western Sydney and Merriwa in coastal Perth.

Across Sydney, 19.8 per cent, or 120,485 people, were dealing with mortgage repayments greater than 30 per cent of their household income.

Census data also revealed 35.3 per cent – almost 232,000 people across the city – had rent payments of more than 30 per cent of their income.

A massive 25.9 per cent of people in Burwood had mortgage repayments greater than 30 per cent of their household income, with that number increasing to 38.5 per cent for renters.

Other areas where residents said they were experiencing mortgage stress include Canterbury-Bankstown (25.6 per cent of homeowners, 42.8 per cent of renters), Fairfield (25.4 per cent of homeowners, 48.5 per cent of renters), Strathfield (25 per cent of homeowners, 31.3 per cent of renters), Cumberland (24.7 per cent of homeowners, 36.4 per cent of renters), and Parramatta (24.3 per cent of homeowners, 34.1 per cent of renters).

Mr North estimated that 45.1 per cent of households were “effectively spending more than they are receiving”, up from 43 per cent a month ago.

Optimistic realtors

Despite this, property sector professionals remain relatively upbeat.

A survey of Property Council members found the overall Confidence Index dropped 19 points nationally in the June quarter yet remained in positive territory (118 index points) and slightly below the long-term average (124 index points). A score of 100 is considered neutral.

Property Council of Australia Chief Executive Ken Morrison said despite the decline in confidence caused by larger external factors such as inflation, skill shortages, and disrupted supply chains, the sector remained positive about its own work pipelines and staffing plans.

"What we’re seeing in this survey is a steep confidence dip in the broader outlook, yet specific firms remaining optimistic about their own business conditions,” Mr Morrison said.

“There is no doubt that the lingering effects of COVID, inflationary pressures and interest rate implications, energy and staffing shortages as well as global geopolitical issues, have left a dent in confidence, and that comes as little surprise.

“However, when asked to reflect on their own business plans, respondents felt well-positioned to withstand those headwinds, which is why, combined with historic low unemployment figures, confidence overall is still in positive territory,” he said.

The survey of more than 750 respondents showed future staffing level expectations remained positive in every state and territory over the quarter, with Victoria (31) and Western Australia (30) returning the strongest figures. A score of 0 is considered neutral.

Future work expectations also remained in positive territory but saw declines in every market aside from WA.

ANZ Senior Economist Felicity Emmett said property sentiment has taken a hit on the back of two rate rises already delivered by the Reserve Bank, and the expectation of a steep increase in interest rates over the coming year.

“The prospect of sharply higher interest rates, the turn in the global outlook, and talk of a US recession have all taken their toll on the economic outlook,” Ms Emmett said.

“Firms are now the most downbeat about the economy than they’ve ever been outside of the worst of the pandemic in 2020 and are particularly negative about the availability of debt finance.

“This pessimism seems overdone given how optimistic firms are about their own work schedule and staffing levels,” she said.

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