Homeowners could be soon forking out up to 50 per cent of their income on mortgage repayments if the cash rate reaches 4.6 per cent, according to new analysis.
According to Canstar, should the cash rate reach 4.6 per cent, couples in Sydney who purchased a median priced house for $1.4 million, with a 20 per cent deposit, in April last year and maxed out their borrowing capacity, could end up spending 50 per cent of their before-tax income on repayments.
Borrowers in Canberra could also be hit hard, should the cash rate keep rising, with couples likely to face paying 48 per cent of their income, followed by Melbourne (47 per cent), Brisbane (46 per cent) and Hobart (44 per cent).
NAB has projected two more RBA rate hikes, which would see the cash rate hit 4.6 per cent – slightly more than the average of the past 33 years at 4.5 per cent.
Canstar’s finance expert, Steve Mickenbecker said the pace of interest rate rises over the past year had resulted in an unprecedented escalation in the amount of household income absorbed by repayments.
“Interest rates have gone up so quickly that pay rises have gone nowhere towards covering higher repayments,” Mr Mickenbecker said.
“Borrowers who qualified for their loan at the limit of their affordability just before the Reserve Bank started to lift the cash rate last year would have no chance of qualifying for the same loan today.”
Mr Mickenbecker said there was a rule of thumb that says contributing anything above 30 per cent of gross income to repayments represents mortgage stress and these borrowers were way above that.
“When you pull tax and the loan repayments out, these recent borrowers in Sydney will have only 34 per cent of their net income left,” he said.
“They will be living on around $6000 per year more than the age pension to cover other living expenses, without the benefit of other savings and maybe bringing up a family.
“With inflation still raging, there’s just not enough cash left to cover food, clothing, electricity, phones, education, transport, insurances, healthcare and more.”
He said all around the country, this scenario was playing out to varying degrees.
“Couples who took out loans for median priced houses a year ago up to the limit of their affordability now have repayments that exceed the 30 per cent gross income threshold for mortgage stress,” he said.
“For borrowers who are better off and have not hit mortgage stress, now is the time to refinance into a low-cost loan with savings of hundreds of dollars a month potentially on offer.”
Mr Mickenbecker said waiting until they were desperate was not an option mortgage holders should consider as, by then, the chance to refinance may have dried up.
“Recent borrowers who are already in stress will not find banks too receptive to helping them refinance and nor have they had time to build up their offset or redraw balances, or the latitude to extend the term of their loan,” he said.
“They will have to interrogate the household budget for ways to save elsewhere or supplement their income.”
According to Mr Mickenbecker, lenders have hardship provisions that can provide help for the short term.
“Borrowers should be aware that short term fixes add to the long-term cost of the loan and how long it likely takes to repay the debt,” he said.
“They should work to get their loan back on track as soon as their financial situation eases.
“For now borrowers need to do what they can in partnership with their lender to keep their heads above water and hold on to their house.
He said it’s no time to hope the problem will go away, but it is time to get on the front foot with your lender.
“Eventually wage growth will provide financial relief and enable most borrowers to put the early 2020s behind them,” he said.
