It seems like every second news story at the moment is about inflation and and the rising cost of living in Australia. Everyday items that most people need to survive like Fuel, Food, Rent, Utilities, Mortgage payments have all increased quite dramatically. Worryingly I don’t think we have seen the worst of the carnage especially when it comes to the increasing mortgage payments.
During the pandemic despite economist predictions, house prices increased more than ever. There were so many factors that lead to this surprising price increase. Interest rates were at all-time lows so people’s borrowing capacity was very high compared to their income. Not to mention the ability to bolster the house deposit by taking 20K out of super. If you were a couple you could access 40K combined. There were government incentives for first home building grants and no one was able to travel so buying property seemed like a good idea. Safe to say that a generation of young adults who have only ever seen very low-interest rates probably didn’t expect the rates to rise as quickly as they have.
Let’s use Sally and Joe as an example. Sally is a school teacher earning 80K per year and Joe is a plumber earning 60K. During the pandemic, they decided to buy their first home and they took out a mortgage of 600K and fixed their interest rate for 2 years at 2.19%. That means their minimum repayment over the 25-year mortgage is $602. Remembering that is the MINIMUM payment….if they only ever paid $602 it would take the entire 25 years to be debt free.
Now Sally and Joe are coming to the end of their 2-year fixed period. Due to the rising interest rates if they now wish to refix their loan with commonwealth bank the one-year fixed rate will be 5.14%*. If they did this their minimum repayment would now be $822 per week that is an extra $220 per week….a lot of money to pull out of nowhere. Especially with the rising cost of all the other household expenses. Joe’s petrol bill has gone from $80 per week to $160 and Sally’s weekly grocery shop has also increased.
If sally and Joe choose to stay variable then they have some options depending on their Loan to Value ratio, however, the rates are still substantially more than what they are used to paying.
Of course, Sally and Joe will look around for other cheaper banks when the time comes to refinance but the point is, how many families like Joe and Sally are out there? Boomers might say “how could you not realise the interest rates would go up eventually?” Well, the fact is that Sally and Joe have never lived through an interest rate rise…only rising house prices. They didn’t want to borrow such a large amount of money but it was their only option if they wanted to buy a 3 bedroom house commutable to their work. The other option was to keep renting in an already inflated and unstable rental market. Not great options for Joe and Sally whose only crime was being born in the 1990s.
A lot of these factors combined mean that at the end of 2023 when we see the bulk of the new loans taken out during the pandemic roll over from fixed, we could see mortgage stress that we have not experienced in the last 20 years. Never had there been a time when house prices have been so high and banks so willing to lend as it was throughout the pandemic.
So what will happen if Joe and Sally can no longer afford their mortgage repayments alongside all the other increasing costs of living? They will be forced to sell. Being forced to sell is never a good thing especially if there are other people also being forced to sell then it creates a glut of property in the market. This is good for buyers as prices will inevitably be lower than usual and the sellers will have less power especially if they need to sell quickly. The increased interest rates also mean that the prospective buyers will have a reduced borrowing capacity from the banks.
Either way, it will be very interesting to watch what happens to the housing market as these interest rates rises come to fruition. It is about time that some steam is taken out of the prices but there will be some unlucky victims. People who overextended themselves, not realising the pain that even a small interest rate increase can bring. People who now have additional costs that they didn’t originally account for such as childcare payments, the list could go on and on.
If you are feeling concerned about your rising payments get in touch with your bank now and have that discussion. There are financial hardship arrangements that can be put in place for you whilst you figure things out. They might be able to reduce your payments or put you on interest only for a period. You may also need to start cutting expenses if you are really stretched to your limits. Either way you have options and don’t be afraid to reach out for help if you need it.
