Commonwealth Bank issues a warning to mortgage holders

Australian home borrowers could be forced to sell their home if interest rates keep on rising and makes it harder for them to pay off their loan, a new survey has found.

Financial comparison group Finder estimates 145,000 homeowners, or about five per cent of people with a mortgage, would be in this situation if interest rates went up by three percentage points.

Finder home loan expert Richard Whitten said more rate rises, to curb rising inflation, would force struggling borrowers to sell in a slowing housing market.

‘After yet another cash rate increase, mortgage repayments for many borrowers are higher than they were a few months ago and likely to climb higher still this year,’ he said.

‘Through the rest of 2022, many homeowners on variable rates will start to struggle more, and we will likely see the number of defaults rise.’

Borrowers in May, June, July and August have already endured 1.75 percentage points of Reserve Bank rate increases, the steepest increases since 1994.

The ANZ bank is expecting the cash rate, now at a six-year high of 1.85 per cent, to hit a 10-year high of 3.35 per cent by November, with larger 0.5 percentage point rate rises in September, October and on Melbourne Cup day.

This would mean borrowers would have copped 3.25 percentage points of rate increases in just six months, with the RBA in May ending the era of the record-low 0.1 per cent cash rate.

That prediction, should it materialise, would see a borrower with an average, $600,000 mortgage paying $1,060 more every month on their repayments compared with May.

This borrower would be owing $3,366 each month, compared with $2,306 in May. 

The banks since November last year have been required to assess a borrower’s ability to cope with a three percentage point rise in mortgage rates, under Australian Prudential Regulation Authority rules.

ANZ and Westpac are expecting the Reserve Bank to stop tightening monetary policy once the cash rate reached 3.35 per cent but the 30-day interbank futures market is expecting a 3.7 per cent cash rate by April 2023.

Financial comparison group Finder estimates 145,000 home owners, or about five per cent of people with a mortgage, would be in this situation if interest rates went up by three percentage points (pictured are houses in Melbourne)

The Finder survey of 308 Australians with a home loan found 48 per cent of them would have to cut back on spending while 14 per cent would struggle to pay their mortgage and bills.

The five per cent who feared they would have to sell their home was estimated to comprise 145,000 home borrowers. 

Those in this situation would be forced to do so in a falling market putting them in a situation, known as negative equity, where a borrower owed more than their home was worth. 

The Commonwealth Bank, Australia’s biggest home lender, is expecting national home prices to fall by 15 per cent by 2023. 

The banks are now much stricter on borrowers with a debt-to-income ratio of six or more, the level APRA deems to be risky.

Australians who borrow the maximum amount allowed are now being advised their have to forego having a credit card. 

Credit ratings agency Moody’s Investors Service said stricter rules were needed to reduce the risk of delinquencies, where a borrower is 30 days or more behind on their mortgage repayments.

‘Stronger loan quality will mitigate heightened delinquency risks as interest rates and inflation rise,’ it said.

ANZ and Westpac are expecting the Reserve Bank to stop tightening monetary policy once the cash rate reached 3.35 per cent but the 30-day interbank futures market (Australian Securities Exchange graph, pictured) is expecting a 3.7 per cent cash rate by April 2023

Moody’s said delinquency rates were likely to ‘increase moderately over the rest of this year, because rising interest rates and higher cost of living pressures will weigh on borrowers’ capacities to repay debt’.

But the credit ratings agency calculated average delinquency rates of two to four per cent, over the past five years, for non-conforming loans, where borrowing criteria isn’t as strict as the major banks. 

Inflation in the year to June surged by 6.1 per cent, the fastest pace since 1990 when the one-off effect of the GST introduction in 2000 and 2001 was taken out. 

Both Treasury and the Reserve Bank are expecting headline inflation – also known as the consumer price index – to hit a fresh 32-year high of 7.75 per cent by the end of 2022.