Younger Australians face $300bn problem when it comes to interest rates

People are facing financial “tough times” and a particular group of Aussies could be hardest hit by rising costs.

Almost two-thirds of Australian homeowners are worried about meeting their mortgage repayments as interest rates continue to be hiked, with younger people who purchased in the past 12 months “acutely” at risk, new research has revealed.

If rates rise again in November as predicted, one in four mortgage holders - up to 1.1 million people - will be at risk of financial stress.

Homebuyers who bought when house prices where skyrocketing in the past two years also face becoming “mortgage prisoners”, who are unable to refinance, as interest rates continue to climb.

Interest rates have skyrocketed from a record low of 0.1 per cent in May to 2.6 per cent in the space of six months.

Australian homeowners aged 44 and under are particularly concerned about their finances, with 74 per cent worried about meeting mortgage repayments, new research from AMP Bank found.

Australian homeowners aged 44 and under are particularly concerned about their finances. Picture: Brenton Edwards/NCA NewsWire

As a result, 58 per cent of Australian homeowners have had to stretch their household budgets to make ends meet, with spending on food and clothing the most common expense to be cut.

Currently, mortgage repayments rank as the largest expense for 68 per cent of homeowners, the research showed.

“We know it’s a tough time for homeowners facing into higher interest rates,” said

Sean O’Malley, AMP Bank group executive.

“For some, refinancing their home loan might help to save money and improve overall financial wellbeing.”

But a sizeable group of borrowers could be locked out of refinancing as they struggle to meet the criteria for a new home lender, with interest rates potentially going higher than 3 per cent this year.

AMP looked into the barriers as to why people don't refinance. Picture: Steven Saphore/NCA NewsWire

Falling house prices are expected to push new buyers’ home loans above the 80 per cent loan to value ratio, where people are required to take out mortgage lender’s insurance, a scenario where banks have no appetite to take on mortgage holders, investment bank Jarden warned.

House prices are set to plummet even further next year with an overall drop of 23 per cent in some states between 2022 and 2023, according to the National Australia Bank.

Research by Jarden chief economist Carlos Cacho estimated there will be hundreds of thousands “mortgage prisoners”, predicting 10 to 15 per cent of homeowners could be trapped with their current lenders.

“There’s probably $200 billion to $300 billion of mortgages which are going to face difficulties refinancing,” he told The Sydney Morning Herald.

“Realistically, most of the people who are going to face difficulties are going to be people who originated their loans in the last two years. If you got a loan five years ago, you’re probably going to be OK.”

Around $200 billion to $300 billion of mortgages are going to face difficulties refinancing. Picture: Getty Images

Banks issuing a new loan must assess a borrower’s ability to service interest rates that are 3 per cent higher than the current rates, meaning they must be able to afford rates at a whopping 7.5 or 8 per cent, compared to just 5 to 5.5 per cent last year.

It comes as AMP research found 43 per cent of homeowners are considering refinancing their

home loan in the next year, with the desire to get a better rate the biggest influence.

At odds though is the finding that younger Australians are more open to refinancing, with 69 per cent saying they were considering it, well above the national average.

Among those considering refinancing in the next year, one-in-five said the complexity was the biggest barrier. Picture: Gaye Gerard/NewsCorp/Daily Telegraph

Among those considering refinancing in the next year, one-in-five said the complexity was the biggest barrier, while a further 13 per cent claimed the time commitment required to refinance was a detractor.

Other reasons people hadn’t yet acted to refinance included the perception that the financial benefits would be too small, and uncertainty around when is a good time to refinance (20 per cent), given the changing interest rate environment.

AMP recently partnered with Nano to create a digital home loan that enables applicants to obtain unconditional approval in as little as 10 minutes, subject to their circumstances.