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.
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.
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.
“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.
Ms Tindall says someone in Sydney who bought in December last year with a 20 per cent deposit is probably already in foreclosure because the Sydney market peaked in January this year and has been falling ever since.
Add to this the number of people who fail banks’ service tests, and that number may well exceed 176,000.
RateCity’s analysis shows that someone who took out a loan in September 2020, and borrowed to capacity, may already have a hard time refinancing, because they won’t meet new lenders’ serviceability test.
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 with a variable rate of 2.69 percent.
Fast forward to today, they would have a loan size of $715,022, they would be earning an estimated $105,062 and if the RBA rises 0.50 percent on Tuesday that will be a rate of 4.94 percent.
“If they wanted to refinance to a lower rate, we estimate a good rate would be 4 percent, they wouldn’t pass the stress test,” says Ms. Tindall.
“In fact, our analysis shows that they will need to earn approximately $5,538 (5 percent) more than they currently do.
“By September of next year, if the cash rate has risen to 3.35 percent as forecast by Westpac and ANZ, they would need to earn roughly $123,750 to pass the banks stress test if they wanted to refinance at a rate of around of 5 percent.”
Ms. Tindall says that these calculations are just estimates, as the amount someone can borrow depends on their personal situation and their lender.
“What we do know at CBA is that between 8.3% and 8.7% of loan applicants borrowed to capacity,” says Ms Tindall.
“It is unlikely that these people will be able to pass the banks’ serviceability tests in the coming months or possibly now.”
Aussies with low fixed rates may struggle to refinance
Christopher Ladley, who runs Mortgage Choice Brokers in Elsternwick, Melbourne, is seeing more clients wanting to refinance.
He says the interest to switch loans is especially high for Australians who have fixed rates and are about to pay off next year or the year after that.
“People are concerned about interest rates rising so rapidly in recent months,” says Ladley.
“People are panicking, because they’re worried about what’s going to happen when they take out a really great fixed rate.”
Mr. Ladley notes that with the banks’ assessment rate for a variable loan now at around 6.5 to 7 per cent, many people could find it difficult to refinance, but he urges people to check with a broker who can help.
“I guess a lot of people got the hint that interest rates weren’t going to go up until 2024, because the Reserve Bank told us so. So people listened to that advice and made decisions based on it.”
He says that because of those RBA statements, some of them “borrowed more than they should have in hindsight”.
“Some people, if they borrowed the absolute maximum a couple of years ago, might not actually qualify for that same loan now in the current environment,” he says.
“Banks are now very aware and focused on debt-to-income. And they’re really not comfortable with people borrowing more than, say, six times their income.”
Are you at risk of falling into a mortgage trap? Consider refinancing sooner rather than later
Ms. Tindall urges people who are not already in a mortgage trap to consider refinancing.
“If you think the proportion you own of your home could fall below that magical 20 per cent mark, think about taking action,” says Ms Tindall.
She says there are many costs associated with refinancing, including exchange fees, government administration fees, and new application fees.
“But they [lenders] you need new customers…ask them to waive that fee up front, they might just say yes to secure their business.”
Ms Tindall also urges those already in a negative equity position not to panic.
“If you have a variable rate, you have the right to haggle with your own lender for a better deal,” she says.
For those who can’t refinance, he says, “the key is to keep your head down and keep your monthly mortgage payments high.”
“If you can’t cover the rising cost of monthly mortgage payments, the bank may start calling you to have some tough talks where you could end up having to sell your property,” says Ms. Tindall.
‘Don’t sell false hope’: Pandemic housing boom left more Australians in debt traps
The other great unknown is what happens with unemployment.
If people start losing their jobs, as Madeline has, they risk defaulting on their home loans.
Unlike many other areas of the country, house price growth in Aveley, where the twins have built their home, has been flat (up 1.2% in the three months to August and up 3% in .7% during the year according to CoreLogic).
But even so, the twins would have already defaulted on their loan if it hadn’t been for their mother’s help, since they don’t meet the higher stress test lenders impose (and they wouldn’t have even if their income had increased). would have kept the same, let’s just go backwards).
Jacqueline says that they would never have taken out a mortgage if it weren’t for the policies and statements of the government and regulators.
She says they rushed into the market hoping to get the $25,000 HomeBuilder grant and promises from the RBA at the time that rates would not rise until 2024.
“Don’t sell false hope” is his message to politicians and regulators.
“You sell the Australian dream, but you rip it out from under the people.”
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