If there is a double interest rate increase this week, more borrowers 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 housing boom and find it impossible to refinance their home loan.

And with another two-fold interest rate increase expected on Tuesday, the sisters, who are already struggling to meet higher mortgage payments, fear losing their home in the coming months.

“We’ve had a lot of difficulties,” says Madeline, who had been working occasional shifts as a Perth hospital clerk before losing her job and having to call her mother, Val, to help her make mortgage payments. required.

“I haven’t been able to pay for a lot of things due to lack of basic living, I haven’t been able to buy a lot of food for myself or even help pay for my car bill, mortgage, everything,” she tells ABC. News.

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

The Darkovska family assessing their finances at their Perth home in August 2022
Jacqueline, Val, and Madeline Darkovska. The family is struggling to refinance as the twins’ variable interest rate rises.(ABC News: Hugh Sando)

Late last year, the nation’s banking regulator, the Australian Prudential Regulation Authority (APRA), introduced stricter “stress tests” that require loan applicants to prove they can afford monthly payments at 3 per cent more. than the current rate.

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

In December 2020, the sisters took out a $360,000 loan to build their dream home, lured by first-time homeowner grants and the $25,000 HomeBuilder grant (the $25,000 was later lost because they learned the brothers didn’t qualify).

At the time of taking out her loan, her only option without a 10 percent deposit was to go to a small lender with a high variable interest rate of 4.54 percent.

With four consecutive rate hikes, their payments have ballooned by $300 a month, and with more rate hikes expected by the end of the year, they could end up with a variable rate of around 8 percent.

That’s a dire prospect the sisters have been contemplating as they fight to keep 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 the highest level since December 2014. It will cause many people, like the Darkovska twins, to further mortgage stress and risk. of breach.

“We’ll probably have to sell the house if we can’t make the payments. We’re really scared,” says Madeline.

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

More Australians in ‘negative wealth’ as ​​house prices fall

Tighter credit standards aren’t the only problem for Australians who took on deep debt at the height of the pandemic housing boom.

Many people who have taken out large loans, with low deposits, also face the possibility of falling property prices, which is another factor that can make them a ‘mortgage prisoner’.

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

“Foreclosure prison is where you can’t refinance, and the main reason would be if your home equity falls below 20 percent,” says RateCity research director Sally Tindall.

Sally Tindall in her Sydney office in August 2022
RateCity Research Director Sally Tindall says many people have a hard time refinancing because their equity is negative. (ABC News: Dan Irvine)

“Banks typically charge refinancing lenders for mortgage insurance, which can run into the tens of thousands of dollars, if they’re refinancing but don’t have that magic 20 percent deposit.”

According to the latest data from banking regulator APRA, in the six months to March this year, the value of new loans underwritten, with a deposit size of 20 percent or less, was $112 billion. RateCity estimates that this is more than 176,000 mortgages.

Be the first to comment

Leave a Reply

Your email address will not be published.