More and more Australians could be facing mortgage stress as the Reserve Bank of Australia (RBA) increases the cash rate for the sixth consecutive month.
The RBA raised rates by another 25-basis points, bringing the rate to 2.6 per cent. Since April, the cash rate has risen each month from 0.10 to 2.35 per cent, which represents the fastest increase in nearly three decades.
In 1994, the Reserve Bank raised rates from 4.75 to 7.5 per cent.
Borrowers, and especially those who have recently borrowed large amounts of money, are set to feel the increase most acutely.
FOLLOW LIVE: RBA considers sixth consecutive rate rise
CoreLogic Head of Research Tim Lawless told ACM many recent homebuyers and prospective homeowners might be facing a precarious position.
If you currently have a mortgage on a variable rate, you will indeed be paying more month to month now that the cash rate has risen.
"Back in April, before interest rates started to rise and the cash rate was a 0.1 per cent, the typical mortgage rate for a variable borrower on a new line for an owner occupier rate was about 2.4 per cent," Mr Lawless said.
"And since that time we've seen [...] mortgage rates to about 4.7 per cent on average now."
When you secure a home loan from a bank, the lender factors in about three rate rises when assessing your ability to pay back your investment.
"So the reality is borrowers now are being assessed on a mortgage rate that's getting close to 8 per cent, whereas five months ago or six months ago now it was about a 4.1 per cent assessment rate, which clearly means borrowing capacity has been impacted quite heavily," Mr Lawless said.
Prospective homeowners, and particularly those with conditional pre-approvals for home loans, might be feeling like the sand is shifting beneath them.
With each new month and each new rate rise, purchase power alters. Mr Lawless recommends having another discussion with your lender or broker, before securing a property.
"The pre-approval is probably no longer relevant or even valid, you know, as soon as the circumstances change they'll probably need to go back and consult with the bank and get an update to that pre-approval," Mr Lawless said.
"Unfortunately with any [...] prospective borrower that's had a pre-approval a few rate hikes ago, then chances are the bank will probably need to re-assess their pre-approval and how much they can borrow.
"Remember, a pre-approval isn't a guarantee the bank is going to lend to you on that amount. There's always going to be an application period and approval period from the bank. So the bank will assess the approval based on the current situation."
If you have a variable mortgage right now, your monthly repayments will have increased with each cash rate hike.
Your mortgage payment is the combination of your principal amount and your interest amount.
The principal payment is the amount of money you borrowed originally.
Subtract your down payment from your home's selling price, and you've got your principal amount.
By contrast, the interest is the cost charged by the bank on what you've borrowed. This is what's subject to change the most with changing cash rates.
"Typically a loan term will be, say 20 to 30 years, and as interest rates are rising, clearly [homeowners] are paying down a larger component on their interest repayments," Mr Lawless said.
"So I think for anybody who's just focusing on paying down their interest at the moment, well clearly the repayments are going to be going higher but their principal isn't going to whittle downwards.
"It's always a good opportunity to pay down your principal when interest rates are really low because it reduces the timeframe of your overall mortgage repayments."
Interest rates as they currently stand will still be a way off from the record high recorded in January 1990, when the RBA brought it to 17.50 per cent.
But, it's still a long way off from the historic low in November 2020, when interest rates sat at just 0.10 per cent.
So, how many more hikes are we facing until we reach the plateau? That's unfortunately very uncertain.
"You've got some private sector economists predicting anything from the high 2 per cent range through to the mid to high 3 per cent range for a terminal cash rate," Mr Lawless said.
"Whereas financial markets or the ASX Futures is still pricing in a cash rate getting up into the early 4s and peaking around June or July of next year."
The inflation rate is currently sitting at 6.8 per cent, which does suggest that between July and August, the rate of inflation has started to ease off.
"If that continues, then chances are we'll start to see that flowing through to RBA decision making," Mr Lawless said.
"These really bulky 50-basis point hikes we've been seeing will hopefully start to move back to a 25-basis point increase and then reach a peak through the first quarter of next year.
"But, as I say, there's a lot of moving parts, especially considering, well sure, inflation might be peaking, but we are seeing rates moving really quickly across other reserve banks, particularly in the US, in the UK and the RBA may simply have their hand forced to keep the currency at a particular level."
The housing market is beginning to dip as a result of the rising interest rates.
CoreLogic's national index indicates that values have reduced by 4.5 per cent in parts of regional Australia, while the largest cities, including Sydney, have seen a 9 per cent reduction from the peak.
"It was back in January that the market peaked and since then that 9 per cent decline equates to a drop of about $104,000 from the market peak," Mr Lawless said.
"So arguably anybody who's bought into the marketplace over the past 12 months is probably now seeing the value of their home lower than what they actually paid for it."
This could signal a problem for anyone who might be looking to sell their home after acquiring it during the market peak last year.
If you're unable to sell your property for at least the price at which you purchased it, you could continue to owe on your mortgage even after the sale.
This is what's known as 'negative equity', it's when the value of the property falls below the existing balance on the loan used to purchase the property.
"It's pretty rare to buy and sell a home within a year or even two years. The typical hold period is getting closer to nine years," Mr Lawless said.
"Time tends to heal all wounds and even if we do see housing prices trending lower, chances are we'll see a stabilisation in housing prices through the first half of next year and maybe even start to see the market moving back into a subtle growth phase once interest rates start to potentially come down either late next year or into 2024."
Widespread negative equity typically becomes a concern when rising interest rates are coupled with high unemployment.
Right now, Australia's unemployment rate is sitting at 3.5 per cent, which is still strong. As long as there is no change to a person's financial capacity, Mr Lawless recommends potential sellers hold off for a little while longer.
"Negative equity isn't likely to be widespread and we aren't expecting any real distress to come into mortgage repayments or the housing sector unless there's a real blowout in labour markets," Mr Lawless said.
"It's only then that if we saw labour markets really loosening a lot that we'd start to see mortgage distress becoming an issue."
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