Rate rise brings borrowers 15 basis points from mortgage stress

Data shows a huge number of mortgage holders are on the cusp of “significant” pain ahead of Christmas – but experts say there are ways to avoid financial stress.

It is becoming more difficult to refinance as interest rates go up.

It’s one minute to midnight for a huge proportion of Australian mortgage holders.

Research released by home loan provider and mortgage brokerage Aussie indicates more than half of mortgage holders expect to feel significant mortgage stress if the cash rate hits 3 per cent, a rate that is now just 15 basis points away.

Aussie surveyed a nationally representative sample of 1,010 borrowers in July when the cash rate was 1.35 per cent.

Another 15 basis point hike could cause pain for 53 per cent of mortgage holders.

At this time, 56 per cent of respondents believed the cash rate would only go as high as 2.5 per cent, while 53 per cent said they would be in significant mortgage stress if it went to 3 per cent.

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Two thirds (65 per cent) of mortgage holders said they were concerned they might default on their repayments as a result of the increased cash rate with almost a third (30 per cent) being definitely or highly concerned.

Australians are battling through higher energy prices and record inflation as well as rate rises.

On Tuesday, the Reserve Bank hiked interest rates by 25 basis points, bringing it to 2.85 per cent on Melbourne Cup day – just 15 basis points away from the financial crunch point highlighted in the research.

It comes as experts warn a growing number of mortgage holders will be unable to refinance to a more affordable interest rate due to the assessment buffers used by the banks in the loan application process.

BuyersBuyers CEO Doron Peleg said mortgage holders facing a 6 per cent interest rate following the expiry of a 2 per cent fixed rate term would naturally shop around for a more competitive deal.

BuyersBuyers CEO Doron Peleg.

But while a record $18.8 billion in owner-occupied loans was refinanced in August, mortgage holders with fixed rate loans soon due to expire faced a challenging landscape as rates continued to rise.

Lending data released by the ABS on Wednesday showed refinancing to a new lender in September dropped by 8.2 per cent from the previous month with $17.33 billion in loans refinanced.

“Unfortunately under the present lending conditions, many do not have the choice of refinancing due to tighter lending rules,” Mr Peleg said.

He said while the assessment buffer of 3 per cent “made sense” when the cash rate was close to zero, recent hikes meant this measure was no longer needed.

Borrowers are facing a dire situation as interest rates continue to climb.

“We’ve now experienced close to 300 basis points of monetary tightening, so the same buffer should no longer be required,” he said.

“The irony is that rules introduced to bolster financial stability could end up being a major source of financial instability if they aren’t taken back to the pre-pandemic settings.”

Canstar editor-at-large and money expert Effie Zahos said falling property prices meant some refinancers would face the additional cost of Lenders Mortgage Insurance (LMI).

“This is an expense that no borrower wants to incur at the best of times, let alone when living costs are steep and interest rates are still rising,” Ms Zahos said.

She said those stuck in “mortgage prison” could consider “downsizing” their loan.

Canstar editor-at-large and money expert Effie Zahos.

“Call your lender and ask to speak to their mortgage variation specialist to see if there is a more suitable, cheaper alternative loan they can offer you,” she said.

Switching from a package variable rate loan to a basic variable rate could provide rate relief without a borrower needing to switch lenders.

She said borrowers facing LMI upon refinancing could still find the switch useful if the LMI is added to the loan and doesn’t need to be paid upfront.

“Look for Lenders Mortgage Insurance discounts,” Ms Zahos said.

“While not mainstream, there are some lenders that waive Lenders Mortgage Insurance for certain professions.”

“Keep in mind that property valuation results can also differ from bank to bank. It’s worth doing your research, checking on a comparison site and chatting with a broker to compare notes.”

Aussie state broking manager Karen Sorrenti.

Aussie state broking manager Karen Sorrenti said it was important to be ahead of the game when it came to avoiding mortgage stress.

“If you’ve avoided financial literacy, now is the time – it’s the gateway to managing – or better avoiding – financial distress,” Ms Sorrenti said.

“Do some calculations – be one step ahead on what you can afford for repayments and what amount would put you on the path to financial strain.”

She said borrowers could consider keeping an offset account to keep interest costs down or look to take advantage of cash back offers when refinancing.

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Originally published as Rate rise brings borrowers 15 basis points from mortgage stress