Lending and mortgage experts have warned Australian borrowers to prepare for steeper interest rate hikes, and more mortgage stress in 2023 as many homeowners have shown signs of struggling.
Australian mortgagors had a tough year in 2022 as they witnessed the Reserve Bank of Australia (RBA) lifting the official cash rate from the historic low of 0.1 percent in May to 3.1 percent in December.
While the rate rises were of the fastest pace in decades, the RBA is unlikely to put a brake on its monetary tightening any time soon as it flagged more potential rate rises in the new year to curb inflation in the December meeting minutes.
Australia’s big four banks have forecasted different peak official cash rates to which the RBA could raise in 2023, with the lowest being 3.35 percent by the Commonwealth Bank and the highest being 3.85 percent by ANZ and Westpac.
According to financial comparison website RateCity, if the cash rate goes up to 3.85 percent under Westpac’s prediction, a homeowner with a typical $500,000 (US$344,000) home loan on a 25-year term will have to pay $1,075 more compared to April 2022, when interest rates were still at a record low.
Homeowners Struggle with Mortgage Repayments
As interest rates climb rapidly, a proportion of homeowners across Australia are having difficulty keeping up with rising mortgage repayments, especially under the context of higher living costs due to inflation.
There have been stories of mortgagors who are forced to consider taking a second job and quitting the university to meet their repayments.
Meanwhile, some less fortunate households are under direr circumstances and have started to miss repayments.
A general view of homes in the suburb of Balmain is seen in Sydney, Australia, on Sept. 7, 2022. (Lisa Maree Williams/Getty Images)
“We are now seeing some missing their repayments. Some are coming back to us saying, ‘look, can we refinance as soon as possible’, or some are having to sell because they may not be able to afford that property anymore,” Mortgage broker Gracious Chidhakwa said, reported the ABC.
“Some are having to make some significant cuts, [whether] that’s stopping their children from going to private schooling, put their children back into public schools just to make ends meet.”
Mortgage Experts’ Warning
While more Australians are facing pressures from sharply rising repayments, Chidhakwa noted that it would take some more time for households to feel the full effect of the recent interest rate rises, which suggests more mortgage stress in the coming months.
Echoing the sentiment, AMP Capital’s chief economist Shane Oliver said further interest rate rises by the central bank would lead to record-high mortgage payments.
“This is likely to result in a sharp rise in mortgage stress–particularly as fixed-rate loans reset this year,” he said, reported the Herald Sun.
According to an RBA’s report in October, around 35 percent of Australia’s outstanding home loans were fixed rate, with two-thirds of these loans due to expire by the end of 2023.
Meanwhile, RateCity research director Sally Tindall warned prospective home buyers to make better preparations if they want to get into the housing market at this time.
“Make sure you can make your monthly repayments even if there’s three, potentially four more rate hikes and make sure that’s in the budget because the time to make changes is now, not in six months’ time,” she said.
Tindall also said that banks and financial institutions would likely impose stricter requirements on borrowers under the current market conditions.
“Buyers will still need to get the green light of approval from the bank, and that’s not easy to do at significantly higher rates,” she said.
“These people are having to prove that they can still make their mortgage repayments at rates of eight percent or over, and that’s going to be a significant hurdle.”
Alfred Bui is an Australian reporter based in Melbourne and focuses on local and business news. He is a former small business owner and has two master’s degrees in business and business law. Contact him at [email protected].
