Two-in-five borrowers tipped to push household budgets to limit

Two in five borrowers who have taken out a mortgage since 2021 could be underwater on their monthly budget if the next two expected cash rate increases are passed on by the banks in full, Aussie Home Loans-owner Lendi Group warned.

As economist predict the Reserve Bank will lift interest rates at least twice to a peak of 4.6 per cent from 4.1 per cent, there is increased concern in banking about the prevalence of “zombie mortgages”. That is, loans written when interest rates were at record lows, where borrowers will struggle to meet higher repayment thresholds.

There is about $270 billion worth of at-risk mortgages written between 2020 and 2022 made to borrowers who took on debt levels of six times their income, broker Barrenjoey estimates.

The country’s mortgage outlook is already “extremely worrying”, but could still “get worse if the RBA continues to hike rates”, says Lendi chief operating officer Sebastian Watkins.

“We could see alarming numbers of households in considerable financial stress,” Mr Watkins, who previously told The Australian Financial Review that nearly half of his mortgage book would roll-off fixed rate loans onto more expensive variable rate loans by the end of the year, said.

The lowest variable mortgage rate that Lendi found in the market was about 5.44 per cent and, according to its analysis of home loan application data, two more rate rises would mean about 40 per cent of borrowers who took out loans during or since 2021 would exceed their monthly budget.

“This data accounts for the borrower’s wage and cost of lifestyle at the time of settlement, it paints an extremely grim picture of the strain rising rates is putting on Australians,” Mr Watkins said.

“It is likely many of these borrowers will be forced to make significant lifestyle alterations or need to consider selling assets to free up cash and service their mortgage payments.”

If borrowers were to miss payments, Mr Watkins said it could leave them in a “mortgage prison”, unable to refinance to a lower rate because they would breach key stress testing criteria for lenders, and fail to qualify for an exemption because they are not a model borrower.

Buffer relief

Lenders must stress test borrowers on interest rates 3 percentage points higher than their current level, per regulatory guidelines. But Commonwealth Bank and Westpac have begun making exceptions, reviewing potential refinancing applicants just 1 percentage point higher than market rates, as long as they meet strict criteria.

These criteria include never missing a repayment, and having an outstanding loan that is less than 80 per cent of the property’s value. Applicants will also have to submit themselves to full income, expense and liability verification.

Mr Watkins said further rate increases and the potential for stressed borrowers to miss repayments would mean those “feeling the worst financial pressure [will be] impacted the most, leaving them unable to seek a better deal”.

The RBA has lifted interest rates 12 times in its 13 past meetings, adding about $20,000 to annual repayments on a $750,000 loan, in one of the most aggressive monetary policy tightening cycles on record. The central bank’s policy-setting board next meets on July 4.

With RBA deputy governor Michele Bullock also warning unemployment has to reach 4.5 per cent in the next 18 months to sufficiently defeat inflation, Barrenjoey analyst Jon Mott said a technical recession – two straight quarters of contraction – was likely, and the jobless rate could stretch as high as 5 per cent creating a wave of “zombie mortgages”.

“This will have a significant impact on many mortgagors who borrowed their maximum,” Mr Mott said. “Many of these customers are likely to fall into delinquency as serviceability buffers have been exceeded, real wages have fallen, and additional work is likely to become harder to come by.”

Resource: afr.com