More mortgage changes are coming for Australia

In recent months there has been a lot of debate surrounding the “fixed mortgage” and its impact on the housing market and the economy in general.

Opinions about the issue range from those who view it as a non-event, to those who view it with great concern.

Instead of worrying about the opinions of business people and different information, we will look at a wide variety of information from the Reserve Bank, major banks and other sources. so you can make your own decisions.

A ‘fixed mortgage’

The term “mortgage rate drop” has come to describe the hundreds of thousands of mortgages that have expired, with those borrowers experiencing low rates moving toward higher rates. change more.

If Westpac’s loan book is broadly representative of the country’s mortgages, around 18 per cent of all mortgages are facing record low rates. change within this year.

According to data provided by the RBA, the average tenure of the debtor has a period of three years or less, written between the beginning of the disease and the end in 2021, there was an interest rate of 2.14 percent.

Once the November and December price increases in the variable rate residential mortgage are fully accounted for, the average rate is 5.6 percent.

Although the big four banks all have different opinions on exactly where the money will come from here, because of the current situation many expect at least two more increases.

That would put the average exchange rate for owner-occupiers somewhere in the region of 6.1 percent.

Not enough protection

During the period when many of these affordable mortgages were written, the rate used by the banking regulator APRA was a rate that was 2.5 percent higher than the mortgage was written. This protection was later increased to 3 percent in October of 2021.

As of today, the average borrower faces a 3.46 percent increase in the rate they pay on their mortgage.

For those who used some of the cheapest loans that offer a figure close to 3.9 percent increase.

Even at current rates, mortgage holders are likely to face an increase in their mortgage rate that is far greater than the reserve price. used by APRA at the time the loans were underwritten.

The challenge ahead

According to an analysis by the RBA, more than 50 per cent of households with a fixed mortgage due to expire in 2023 face an increase in mortgage repayments of 40 per cent or more. , and rates as they are now.

Worryingly, 11 percent of families in this population will see their repayments increase by more than 60 percent.

Determining exactly what the impact will be on this select number of households is a challenge.

While there are some who took mortgages of more than six times their household income, they are now faced with paying more than 40 percent of their income from their home loans, in on the other hand there are families with small mortgages that started in previous years that were refinanced. with a low-cost permanent loan.

The risks are high for a minority

According to a recent study from the RBA, at 3.6 percent of cash (two 0.25 percent increase now) 14.6 percent of mortgages will have negative levels of household income, and put eat them at risk of failure.

Another 8.1 percent will see their household budget spending drop by 60-100 percent.

On the other side of the coin, 6.5 percent of borrowers will be unaffected by 3.6 percent, and another 41.1 percent see their household spending drop by 0.20 percent. .

This makes it clear that not many Australian mortgage holders will be in trouble, with many households holding mortgages. old and young are largely unaffected by rising interest rates.

That is, the 14.6 percent of families with poor income is a large number and more than enough to stimulate the direction of the property market when it is enough to experience serious problems.

All this happened before…

If this example is a large group of homeowners who are seeing their mortgages refinanced at higher interest rates, it is because of all the happened before.

In the United States during the Global Financial Crisis, millions of Americans saw the termination of low-cost “teaser rate” loans, encouraging borrowers to face high exchange rates.

This was a major factor in the creation of the GFC and the collapse of US housing.

In Australia in 2023, the level of borrowing is usually higher than in the US and it seems that the government and Australia cannot follow the same path as their American counterparts.

In the US during the GFC, there were up to 923,000 foreclosures each year, as millions of Americans were driven to the wall by high prices and the ‘Great Recession’.

In Australia, it is likely that lawmakers and banks will resume a plan of ‘Extend and Adapt’ when many borrowers experience serious problems.

This plan was used during the pandemic and effectively allowed borrowers to kick the can down the road in various ways in the hope that they would resume paying their mortgage as usual.

Through the rapid improvement of the economy, $ 188 billion in financing in banks at only 0.1 percent and a commitment of more than half a million dollars in stimulus, this strategy worked.

By 2023, ‘Extend and Pretend’ is likely to replace borrowers with interest-only loans, despite 30-year loans and borrowers retiring with mortgages being the norm in recent years. eat now.

As with the pandemic, the outcome of the “permanent mortgage default” and ‘Extend and Pretend’ strategy will depend heavily on the backdrop of general economic conditions and how the world economy is dealing with the twin challenges of high interest rates and high inflation.

Tarric Brooker is a freelance writer and publicist | @AvidCommentator

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