One in 10 first home buyers face mortgage prison
These so-called ‘mortgage prisoners’ have less than 10 per cent equity in their homes as rising rates and peaking property prices create a cocktail of pain in some suburbs.
The Reserve Bank’s recent run of rate rises has left one in 10 people who bought their first home in the recent boom no longer able to qualify for their loans and now facing difficulty refinancing, according to new analysis by loan brokerage Lendi.
These so-called “mortgage prisoners” have less than 10 per cent equity in their homes as rising rates and peaking property prices create a cocktail of pain.
The analysis by Lendi for The Australian found a quarter of first-home buyers who purchased this decade fixed on a rate of 3 per cent or lower, and their loans are set to expire this year or next.
Based on the average loan for a first home of $557,000, the jump in repayments could be as stark as $16,617 annually.
Lendi chief executive David Hyman said many young people with their first home were less likely to have a bigger deposit.
“Roughly one in 10 have a loan-to-value ratio over 90 per cent and they will obviously find it the hardest to refinance because, more often than not, a first-home buyer is going to be borrowing at the edge of their borrowing capacity as well,” Mr Hyman said.
While property price falls do appear to have now dodged the worst of predictions, the modest national rise of 1.41 per cent has not been able to offset the peak-to-trough falls of 4 per cent since the end of the boom in March 2022 to the low point in December 2022.
The Reserve Bank’s surprise May rate rise after a pause in April sent a shockwave through the market after what had already proved the fastest hikes in a generation.
PropTrack director of economic research Cameron Kusher said given how quickly prices were moving through the pandemic, people may have been more inclined to borrow a little bit more than then they would have to try to secure a home.
“Remember, the Reserve Bank was still saying right up until about October of 2021 that they didn’t expect interest rates to rise until 2024,” he said.
“A lot of people probably felt like, well, if interest rates are going to be on hold to 2024, prices are going to keep rising so I’ll get in now and my price will be worth more and I’ll have the equity.”
Home prices are currently rebounding strongest in blue-chip areas of major capital cities, with middle-class homeowners in outer-mortgage belt suburbs unlikely to recoup their losses anytime soon.
The Morrison Government launched its hugely popular First Home Loan Deposit Scheme in January 2020, offering 10,000 market entrants the chance. The first intake and those that followed in July 2020 and 2021 were fully subscribed.
Mr Hyman was supportive of schemes that help assist people to get a foot on the property ladder, although he noted fewer would be able to buy following the interest rate rises.
“First-home buyers and people earlier in their property journey are going to be hardest hit in terms of the rate rises,” he said.
“When those schemes first came out when interest rates were really low, you had to fight to get a place. Now we’re seeing capacity in those systems.
“That tells you that there’s less demand, principally driven by the serviceability issues.”
New spaces to access the First Home Guarantee will be made available on July 1.
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