‘Mortgage stress’: New home owners squeezed hardest as repayments skyrocket

Many new home owners could see half their incomes consumed by mortgage repayments in coming months as the Reserve Bank pushes through interest rate hikes to curb inflation.

Figures published by Canstar on Monday revealed someone who bought a home at the national median price of $818,000 in April 2022 could pay $4542 per month if the cash rate hits 4.6 per cent – as is now forecast by National Australia Bank.

That’s more than half (55 per cent) of average after-tax income, Canstar’s money expert Steve Mickenbecker said.

“The pace of interest rate rises over the past year has resulted in an unprecedented escalation in the amount of household income that is absorbed by repayments,” Mr Mickenbecker said.

“Interest rates have gone up so quickly that pay rises have gone nowhere towards covering higher repayments.”

‘Way above’ mortgage stress

Expectations of two further rate hikes have been building since the RBA surprised markets with a 0.25 percentage point increase in June, citing fears that inflation isn’t easing fast enough.

Already more than $1100 has been added to monthly repayments on a typical $500,000, 25-year home loan since May 2022 when central bankers first began rate increases.

Home owners who bought in 2021 or early 2022 are being squeezed hardest because prices were much higher then and borrowing power was much higher amid record-low interest rates.

“Borrowers who qualified for their loan at the limit of their affordability just before the Reserve Bank started to lift the cash rate last year would have no chance of qualifying for the same loan today,” Mr Mickenbecker said.

“Sydney, where higher house prices mean bigger loans, will be home to the most stressed borrowers if the cash rate reaches 4.6 per cent, with repayments wiping out 50 per cent of a couple’s gross annual income.

“There is a rule of thumb that says contributing anything above 30 per cent of gross income to repayments represents mortgage stress and these borrowers are way above that.”

Figures published by Roy Morgan earlier this month had already revealed rates of mortgage stress are soaring, with tens of thousands of additional home owners set to become “at risk” in coming months if rates rise in July and August.

Mr Mickenbecker said home owners struggling with repayments should consider refinancing to a cheaper rate if possible, or even potentially contacting the bank for financial hardship support.

“Borrowers should be aware that short-term fixes add to the long-term cost of the loan and how long it likely takes to repay the debt,” he said.

“They should work to get their loan back on track as soon as their financial situation eases.”

Inflation fears to spark hikes

When the RBA hiked in June governor Philip Lowe said central bankers wanted confidence that their forecast for inflation to fall back to their target by mid-2025 would come to fruition.

But many economists don’t think the RBA will gain that confidence without higher interest rates.

That’s because of concerns about stubbornly high services inflation and the possibility that wages growth begins feeding into prices in the absence of stronger productivity gains in 2023.

NAB economists say rate hikes in July and August are likely, taking the cash rate target from the current 4.1 per cent to 4.6 per cent.

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