If there’s a double interest rate hike this week, more borrowers will become ‘mortgage prisoners’

Like hundreds of thousands of other Australians, Madeline and Jacqueline Darkovska are prisoners of their mortgage.

The 24-year-old twin sisters are among borrowers who bought at the height of the pandemic property boom and find themselves unable to refinance their home loan.

And with another double interest rate hike expected on Tuesday, the sisters, who are already struggling to cope with higher mortgage repayments, fear losing their home in the coming months.

“We’re struggling a lot,” says Madeline, who worked occasionally as a clerk at a hospital in Perth before losing her job and having to rely on her mother, Val, to help her make the required mortgage payments.

“I couldn’t afford a lot of things due to lack of basic livelihood, I couldn’t buy a lot of food for myself or even help pay my car bill, my mortgage, everything,” she told ABC. New.

As banks impose tougher lending standards and interest rate hikes drive house prices down, more Australians will find themselves in a mortgage trap, unable to refinance because no lenders wants to take the risk.

Jacqueline, Val and Madeline Darkovska. The family struggles to refinance as the twins’ variable interest rate soars.(ABC News: Hugh Sando)

Late last year, the country’s banking regulator, the Australian Prudential Regulation Authority (APRA), introduced tougher ‘stress tests’ requiring loan applicants to show they can afford repayments 3% more than the current rate.

But Madeline and Jacqueline entered the real estate market when the stress test was only 2.5% above the rate then.

In December 2020, the sisters took out a $360,000 loan to build their dream home, lured by early homeowner grants and the $25,000 HomeBuilder grant (they later missed out on the $25,000 because learned that siblings were not eligible).

When it came time to take out their loan, their only option with no 10% deposit was to go to a small lender at a high variable interest rate of 4.54%.

With four consecutive rate hikes, their repayments have soared by $300 a month, and with more rate hikes expected to follow by the end of the year, they could end up with a variable rate of around $8. %.

It’s a dire prospect the sisters face as they fight to hold on to their home in Aveley, on the outskirts of Perth.

If the RBA goes ahead with another 50 basis point rate hike on Tuesday, the cash rate will hit its highest level since December 2014. This will put many people like the Darkovska twins in further mortgage stress and risk to be lacking.

“We’ll probably have to sell the house if we can’t meet the repayments – it’s really scary for us,” Madeline says.

Val and Madeline in their living room in Aveley Perth in August 2022
Val Darkovska (left) helps her daughter Madeline (right) with mortgage payments.(ABC News: Hugh Sando)

More Aussies in ‘negative equity’ as house prices fall

Tighter lending standards aren’t the only problem for Australians who borrowed heavily during the height of the pandemic property boom.

Many people who have taken out large loans, with low deposits, also face the prospect of falling house prices, which is another factor that can make them “mortgage prisoners”.

If home values ​​fall by 20% over the next 18 months, as some analysts predict, it would tip more Australians into negative equity – when the value of the property falls below the outstanding balance of the mortgage used to buy it.

“Mortgage jail is where you can’t refinance, and the biggest reason would be if your home equity falls below 20%,” says Sally Tindall, director of research at RateCity.

Sally Tindall in her Sydney office in August 2022
RateCity research director Sally Tindall says many people struggle to refinance because they have negative equity. (ABC News: Dan Irvine)

“Banks typically charge refinance lenders mortgage insurance, which can be in the tens of thousands of dollars, if they refinance, but don’t have that magic 20% deposit.”

According to the latest data from banking regulator APRA, in the six months to March this year, the value of new loans taken out, with a deposit size of 20% or less, was $112 billion. RateCity estimates it to be over 176,000 mortgages.

Ms Tindall says someone in Sydney who bought in December last year with a 20 per cent down payment, is probably already in mortgage jail because the peak of the Sydney market was in January this year and n has stopped falling since.

Add to that the number of people who can’t pass bank function tests, and that figure could well exceed 176,000.

RateCity’s analysis shows that someone who took out a loan in September 2020 and borrowed at full capacity may already be struggling to refinance, as they will not meet the utility test of new lenders.

RateCity modeled this by looking at someone who had an annual income of $100,000 (no children, no other debts, and minimal expenses) and took out a $747,500 loan at a variable rate of 2. 69%.

Fast forward to today, they would have a loan of $715,022, earn about $105,062 and if the RBA goes up 0.50% on Tuesday, they will have a rate of 4.94%.

“If they wanted to refinance at a lower rate, we estimate a good rate would be 4%, they would fail the stress test,” Ms Tindall said.

“In fact, our analysis shows that they will need to earn approximately $5,538 (5%) more than they currently do.

“By September next year, if the cash rate has risen to 3.35% as expected by Westpac and ANZ, they would need to earn around $123,750 to pass the banks’ stress test if they were to refinance at a rate of around 5%.

RateCity Table
RateCity says many Australians looking to refinance will not be able to meet the tougher tests imposed by banks.

Ms Tindall says these calculations are just estimates, as how much a person can borrow depends on their personal circumstances and their lender.

“What we know is that at the ABC, between 8.3% and 8.7% of loan applicants have borrowed at full capacity,” Ms Tindall said.

“These people are unlikely to be able to pass banks’ serviceability tests in the coming months or potentially already.”

Australians with low fixed rates could struggle to refinance

Christopher Ladley, who runs Mortgage Choice brokers in Elsternwick, Melbourne, is seeing more and more clients coming forward to refinance.

Christopher Ladley in his office in Elsternwick in August 2022.
Melbourne mortgage broker Christopher Ladley says new customers are showing up to refinance. (ABC News: Sean Warren)

He says interest in switching loans is particularly high among Australians who have fixed rates and are about to retire next year or the year after.

“People are worried about how interest rates have risen so quickly and so rapidly in recent months,” Mr Ladley said.

“People freak out, because they worry about what happens when I take out a really good fixed rate.”

Mr Ladley notes that with the banks’ valuation rate for a variable loan currently around 6.5-7%, many people may find it difficult to refinance, but urges people to check with a broker who might be able to help them.

“A lot of people, I guess, got the indication that interest rates weren’t going to go up until 2024, because the Reserve Bank told us that. So people listened to that advice and made decisions depending on these.”

He says that because of these RBA statements, some of them “borrowed more than in retrospect they should have”.

“Some people, if they borrowed the absolute maximum a few years ago, they might not qualify for that same loan now in today’s environment,” he says.

“Banks are now very conscious and focused on the debt-to-income ratio. And they’re really not comfortable with people borrowing more than, say, six times their income.”

At risk of a mortgage trap? Consider refinancing sooner rather than later

Ms Tindall urges people who are not yet in a mortgage trap to consider refinancing.

“If you think your owning proportion of your home might drop below the magic 20% mark, think about taking action,” Ms Tindall says.

She says there are many costs associated with refinancing, including transfer fees, government administration fees and new application fees.

“But they [lenders] need new customers…ask them to waive that upfront fee, they might just say yes to secure your business. »

Ms Tindall also urges those who are already in a negative equity situation not to panic.

“If you have a variable rate, you have the right to haggle with your own lender to get a better deal,” she says.

For those who can’t refinance, she says, “the key is to put your head down and maintain your monthly mortgage payments.”

“If you can’t keep up with the rising cost of monthly mortgage payments, the bank may start calling you to have difficult conversations where you might end up having to sell your property,” Ms Tindall says.

‘Don’t sell false hopes’: Pandemic property boom left more Australians in debt trap

The other big unknown is what happens with unemployment.

If people start losing their jobs, like Madeline, they may default on their home loans.

Unlike many other parts of the country, house price growth in Aveley, where the twins built their home, has remained flat (up 1.2% in the three months to August and up 3. 7% over the year according to CoreLogic).

But even so, the twins would have already defaulted on their loan without their mother’s help because they don’t pass the higher stress test imposed on lenders (and wouldn’t even if their income had stayed the same, leave alone back).

Jacqueline says they would never have taken out a mortgage without the policies and pronouncements from the government and regulators.

Jacqueline with her mum Val in their living room in Perth in August 2022
Jacqueline says they were drawn into the housing market because of statements from policy makers and regulators. (ABC News: Hugh Sando)

She says they rushed into the market hoping to secure the $25,000 HomeBuilder grant and promises from the RBA at the time that rates would not rise until 2024.

“Don’t sell false hopes,” is his message to politicians and regulators.

“You’re selling the Australian dream, but you’re taking it away from people.”

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