As interest rates rise, a major flaw is being exposed in Australia’s way of providing mortgages. How could this ever happen?
Interest rates rose from 0.1 percent to 0.35 percent on Tuesday and it may be the start of a very long and scary road for all the Aussies who have taken out huge mortgages while interest rates have been low.
It has been predicted that interest rate hikes could happen every month this year and that if they go too high, up to 300,000 people could find themselves in mortgage stress and unable to pay their mortgage.
It’s a worst-case scenario, but it’s also very possible.
For example, if you have a $500,000 loan and the interest goes up 0.15 percent, it’s an extra $40 a month, and frankly, if you can afford a house, you should be able to stretch.
Take that rate increase to 2 percent, though, and it’s an extra $567 per month…which suddenly feels a lot more loaded.
To me, the concern Aussies are beginning to feel is reminiscent of the UK in 2008 when the Global Financial Crisis (GFC) hit. I just hope Australia doesn’t end up on the same road.
Don’t get me wrong, this is a very, very different situation from the GFC. Rising interest rates in Australia is something predictable, something we knew was going to happen and were warned about. Although the Reserve Bank told us it wouldn’t be until 2024.
The GFC was mainly caused by people in the US being given so-called “subprime” mortgages, which are generally given to people with lower incomes. They have higher interest rates and can rise over time. When people stopped paying those mortgages, it had catastrophic global consequences that came as a huge shock to most affected people.
However, one thing is similar. It was ordinary low-income people who suffered the most from the GFC – people who were approved for mortgages they should never have had – and if interest rates rise in Australia, it will be those people who are strapped for cash. money again.
I was in my twenties when the global financial crisis hit the UK. Not long out of college and optimistic about finally making some money, I was brutally slapped in the face when the GFC came along.
I was fired (twice) and when I got a long-term job I got a five-year pay freeze. Luckily I didn’t have a house of my own at the time, otherwise I would probably have had to declare myself bankrupt.
I’m not gonna lie, it was a grim time. It was especially grim in underprivileged areas like Nottingham, where I lived, where people had been encouraged to take out 100 percent mortgages with no deposit.
People defaulted on those mortgages and houses plummeted in value as banks sold properties to recoup their money. “For Sale” signs flooded the city, especially in areas where cramped new construction had been put up by greedy developers who wanted to make the most of the fact that everyone seemed to be able to buy a home, no matter how low their income.
The dream of owning a house had been sold to these people and banks had lent them the money. They hadn’t been greedy or lied about what they earned, they had been offered these deals from prestigious financial institutions that should have known better.
Many fingers were pointed at who was to blame. In the end, the British public blamed the banks, but there seemed to be no real consequences for them.
Going through the GFC at such a young age, I had a lasting fear of ever being able to pay my mortgage. I swore I would never buy a house with a down payment of less than 10 percent and never have a mortgage more than five times my income, tempting as it was.
However, many Aussies have done just that – buying homes that they may not be able to make payments on if interest rates rise.
They’ve taken money out of retirement, taken out interest-only mortgages, and taken out huge loans that are now affordable, but it could be a very different story by Christmas when the cash interest hits 2 percent.
Over the past two years, APRA data shows that 280,000 people or households have taken out mortgages that are more than six times their income and/or have a high loan-to-value ratio, meaning they are at high risk of mortgage stress .
If interest rates were always going to rise, why would this happen?
If 300,000 Aussies end up being unable to pay their mortgages, it would be a disgrace for Australia. Shame, because they probably should never have gotten the mortgages.
Home ownership is part of the Great Australian Dream and everyone should be able to achieve it, but not at the cost of everything they have.
Riah Matthews is the commissioning editor for news.com.au.