Recent buyers are at risk of having at least $110,000 reduced in value from their homes as interest rates rise and property prices plummet, according to new analysis.
Borrowers who bought in the last six months are “at higher risk,” even if they had a 20 percent deposit, according to the Canstar research.
It found that if property prices fall by the predicted 15 percent, buyers who purchased their dream home just six months ago face their equity shrinking from the original $180,000 to just $70,000.
But if the Reserve Bank of Australia continues to hit homeowners with outsize rate hikes and property prices drop 23 per cent, it could see recent buyers plunge into dangerous territory with home value. $5,000 less than what is owed on the loan.
Meanwhile, Australians who bought a home just 12 months ago would not be as affected by a 23 per cent drop in house prices, as their property is still valued at $63,000 more compared to their mortgage.
In even greater contrast, a buyer from 10 years ago should still have 46 percent equity or $314,000 against their home loan after the biggest price drop of 23 percent, even if they haven’t made additional payments for get ahead.
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There’s nothing like rising interest rates and falling property prices to highlight the divide between borrowers who have been in the market for a long time and more recent buyers, said Steve Mickenbecker, a finance expert at Canstar.
“This is the story of two borrowers, those who have been in the market for several years and those who are newcomers with larger loans and repayments, no time to build a cushion, and little capital if home prices fall as expected. I expected,” he told news.com .au.
“After 10 years of property appreciation, homeowners have built up impressive value on their property, to the point where the average homebuyer should own about two-thirds of their home. A price drop could erase some of the extraordinary increases of the last two years, but it is little more than a blip.
“Buyers in the six months leading up to peak ownership are facing negative or near-negative equity pressure in their property, having bought at the top, and will feel extreme pressure.
“Negative equity is a worrying concept, but it doesn’t mean borrowers will end up on the streets. Banks don’t sell people because the housing market moved, but negative equity loans will make them nervous if the borrower falls behind on payments.”
Increase in interest rates
It’s not just the fall in home prices that shows the stark difference between recent buyers and those who bought a decade ago.
A buyer who bought at the median price 10 years ago will have repayments of $1,936 a month, compared to a buyer six months ago who paid $3,623 a month, but they are both paying an 80 percent loan on a $929 median-priced home 000, Canstar found.
Even those who bought 12 months ago are paying $400 less on their home loans compared to more recent buyers.
Most borrowers will be able to find a loan with a lower interest rate and repayments than they have, and banks will strive to refinance borrowers with more than 30 percent equity, Mickenbecker said.
“But if your principal is approaching zero and your loan payments are starting to eat into your income, you’ll probably be held hostage by your current loan,” he warned.
To keep the bank happy, borrowers always have to keep their payments on time at all times, he added.
“It’s just that the penalty for falling behind can be quicker and more final for buyers with no capital or background to fall back on,” he said.
“Maintaining payments will also be more of a challenge for recent buyers, who face payments nearly double those of 10-year veterans, and higher increases if rates continue to rise.
“If borrowers find themselves unable to meet payments, this is no time to bury your head in the sand. Talk to your lender, who will have hardship policies and measures. Go to them with the proposed solution and timing, not just the problem.
“The best newer borrowers can do is keep up with payments and hang on to protect their small foothold in the real estate market. These things go in cycles and this phase too will pass, so hopefully the next time we face this scenario, it will be the veterans for sure.”
How much can house prices drop?
Some experts have predicted that house prices could fall as much as 30 percent.
However, others have not predicted such a dramatic change.
Proptrack forecast that home prices could fall as much as 5 percent in the next five months and are expected to drop 15 percent by the end of next year.
Commonwealth Bank has also backed the prediction that house prices will fall 15 per cent over the next 18 months in Australia and 18 per cent over the next two years in Sydney and Melbourne.