New financial risk facing Aussie homeowners

With the RBA announcing yet another rate rise to 3.35 per cent, thousands of Aussies are locked into “mortgage prisons”.

In a landscape of skyrocketing interest rates and a cost of living crisis that has seen staples like groceries, petrol and utilities increase over the past year, a growing number of Australians are already feeling the pinch.

With the RBA announcing yet another rate rise – the ninth in a row, of 25 basis points – the cash rate now stands at 3.35 per cent.

Around 15 per cent of households are at extreme risk of mortgage stress. Picture: iStock

According to Roy Morgan research, 22.8 per cent of mortgage holders are at risk of experiencing mortgage stress (where your monthly repayments consume more than one-third of your monthly income), with a further 15 per cent of households considered “extremely at risk”.

And sadly, along with terrifying terms like ‘mortgage cliff’ (the phrase used to describe the period when a fixed interest rate period on a mortgage ends, leaving the homeowners with a much higher interest rate and thus, bigger monthly repayments), there’s another scenario poised to affect thousands of consumers – mortgage prison.

Find budget strategies to manage rising mortgage payments with news.com.au Compare Money. Read our guide now

Andrew Wheatley said many Australians are finding themselves in mortgage prison in 2023. Picture: Supplied

“Mortgage prison refers to a position some people – who borrowed money when rates were much lower – find themselves in,” Wheatley Finance director Andrew Wheatley said.

“Because rates have risen so quickly, many of these people are still earning the same amount they were when they took out their mortgages, but now can’t afford to borrow the amount they owe based on new interest rates.

“Effectively, they’re trapped with the bank they’re with, and they can’t refinance even if they want to. The bank can charge them whatever they want.”

Adrian*, a 27-year-old project manager from Sydney, said it’s a situation he knows all too well.

Having bought his first apartment, a two-bedder in the Sydney suburb of Zetland, at the peak of the property market surge in 2021, Adrian has been watching in horror as rising interest rates, a price correction in the market and the end of his fixed interest rate period have effectively trapped him with his current lender.

“A lot of my friends, and even my parents, have managed to refinance and lock in tolerable rates for a while, sparing them the worry of further rate hikes,” he said.

“But because the bank assesses the serviceability of your loan at a much higher rate than you’re actually paying, I no longer qualify to re-borrow with another lender.”

Adrian said, short of getting a significant pay rise or a second job, both of which he is considering, his hands are tied for the foreseeable future.

“I’ve made some lifestyle changes and yes, I can still afford repayments – for now,” he said.

“But I worry constantly about just how high they’ll go.”

Aussies could be stuck in a ‘mortgage prison’ following the RBA’s rate rise. Picture: iStock.

Market analyst firm Jarden estimates more than one in 10 mortgage holders are set to find themselves in this position in 2023.

Research by Jarden chief economist Carlos Cacho estimates there could be hundreds of thousands of these “mortgage prisoners”.

Around 10 to 15 per cent of outstanding home loans could be impacted, with first homebuyers who bought near the property price peak particularly exposed to the risk.

“There’s probably $200 billion to $300 billion of mortgages which are going to face difficulties refinancing,” he said.

Falling property prices to compound the issue

NAB estimates median house prices could fall by as much as 22.3 per cent this year, meaning Sydneysiders can expect a drop of about $175,000, while the average house price in Melbourne will plummet $156,000.

A drop in property prices, combined with rising interest rates (most experts expect at least another one or two hikes in 2023 before rates stabilise) can worsen the situation for many mortgage holders, who – with a less valuable asset – are even more vulnerable to mortgage prison.

Peter Dragicevich said borrowing power is down since the Reserve Bank of Australia started increasing interest rates. Picture: Supplied 

Peter Dragicevich, currency strategist at Corpay Cross-Border Solutions, said Australians are dealing with a significant reduction in borrowing capacity, based on the current financial landscape.

“For every 1 per cent that the RBA raises rates, it effectively means that a person’s borrowing power falls by about 10 per cent,” he said.

“So relative to where we were at the start of last year, before the RBA started hiking, borrowing power is down about 25 or 30 per cent. Obviously, that is already feeding through into less lending and property prices coming down. Outlook and sentiment for the property market is still quite negative at the moment, and I think the adjustment in prices probably still has more to run.”

*Name changed to protect privacy.

Comparison is powered by Fair Comparison Pty Ltd who do not compare all providers in the market, or all products from those providers. News Life Media Pty Ltd and Fair Comparison do not provide credit assistance, advice or recommendations and may receive a fee if you click through, apply, or successfully qualify, for a product displayed. Learn more