RateCity says borrowers face ‘mortgage prison’ if they can’t refinance

A forecast $150,000 plunge in house prices could see thousands of Australians – especially first homeowners – owe more than what their house is worth, sentencing them to ‘mortgage prison’.

Thousands of Australians, especially first homeowners, face serving time in a “mortgage prison” if they can’t refinance their loans in the wake of a forecast $150,000 drop in house values across the nation.

ANZ this week revised down its housing forecast and now anticipates capital city property prices to fall 18 per cent until early 2024 as interest rates rise.

According to a RateCity.com.au analysis of the ANZ forecast the national median house price could drop by $150,518 by the end of next year,

Sydney’s median house price is set to fall even further, with an estimated drop of $204,543 between July 2022 and the end of 2023, taking it to $1,141,650.

In Melbourne, the median house price could fall by $128,141 from July 2022 to the end of 2023 to $836,809, while prices could drop by more than $160,000 in Brisbane and Adelaide by the end of next year.

If the ANZ forecasts are correct, a RateCity.com.au analysis found that if someone bought a median-priced house in Sydney in December 2021 with a 10 per cent deposit, they could owe the bank 8 per cent more than their home is worth by the end of 2023.

This is despite the fact they would have been paying down their debt for two years and by the end of 2024, they could owe the bank almost exactly as much as the property will be worth.

More mortgage stress forecast.

RateCity.com.au research director Sally Tindall said borrowers needed to own at least 20 per cent of their property in order to refinance, otherwise their new lender will hit them with costly lenders’ mortgage insurance, which could negate any potential savings.

Those in negative equity were likely to find lenders aren’t willing to take them on at all.

First home buyers who took advantage of the Federal Government’s low deposit scheme, are among the borrowers most likely to be impacted.

“Increasing numbers of people will find themselves trapped in mortgage prison, stuck with their current lender, until they can build their equity above 20 per cent,” Ms Tindall said.

“Being in mortgage prison isn’t a life sentence, but based on current property forecasts, it could take several years to get out.

“If there’s a chance your equity could fall below 20 per cent in coming months, do a health check on your mortgage now, and consider your options before its too late.”

House prices to plunge further.

Ms Tindall said the Reserve Bank was poised to potentially hike interest rates by another 1 to 1.5 percentage points putting pressure on house prices.

“Falling prices might finally provide some first home buyers with a window in, but it won’t be an easy one to climb through,” she said.

“Would-be buyers now have to pay significantly higher interest rates on prices that are still likely to be well above pre-Covid levels.

“ANZ expects the market to turn back around in 2024, however, an increase in demand from people on the hunt for a good deal could turn around the market sooner than expected. Investors could also come back to the market early if rents continue to rise at the same time property prices fall.

“People who bought at the peak shouldn’t let news of property price drops get them down. What’s important is for them to keep their head down and their mortgage repayments up.”

According to the ANZ forecast median house prices are expected to increase by 5 per cent to $699,448 by the end of 2024 compared to the end of 2023.

In Sydney over the same period they will rise 6 per cent to $1,210,149, in Melbourne 6 per cent to $887,018, Brisbane 5 per cent to $755,652, Adelaide 2 per cent to $550,241 and Perth 3 per cent to 513,422.

The figures are based on CoreLogic’s adjusted median values from December 2021, applying ANZ’s annual forecast