2023 looks set to be a tough year for borrowers. Mortgage rates are rising at a record pace and many borrowers will face challenges in lowering their fixed rates this year.
A new analysis from the Reserve Bank of Australia (RBA) shows that while most borrowers can handle the adjustment, some struggle. This includes some borrowers who cannot make higher repayments and others who cannot refinance.
Mortgage rates have more than doubled over the past year, rising 3.5 percentage points. Many borrowers continue to be protected from higher repayments by periods of fixed rates, but most of these low rates will expire within the next year.
Add to that high inflation pressure on the cost of living, and 2023 looks set to be a nervous year for many households.
But how big is the risk to borrowers? Will their repayments increase enough to force them to sell or default on their homes? And “mortgage prisoners” who can’t refinance for a better deal? Are there significant numbers of
RBA’s latest financial stability review Consider these risks in detail.
15% of borrowers struggle to increase their repayments
This is the result of the RBA’s analysis of the impact of rising interest rates, inflation and unemployment on borrowers. The RBA predicts that borrowers’ “surplus cash flow” — the money left over after making mortgage payments and other expenses — will drop dramatically for many.
About a quarter of borrowers are estimated to have their reserve cash flows down by more than 25% this year.
* Baseline scenario assumes wages, inflation and unemployment rate change in line with SMP forecasts for February 2023. The unfavorable scenario assumes that the unemployment and underemployment rates rise by 2 percentage points from his December levels, while wages and inflation moderate. Both scenarios assume that cash rates are held at approximately 3 percent and 3/4 percent.
Sources: ABS; HILDA Research Release 21.0; Melbourne Institute; RBA;
About 15% of borrowers are estimated to have negative excess cash flow, meaning they can no longer afford to pay their loans.
It’s hard to say how these vulnerable borrowers will react. Given the very low unemployment rate of 3.5% he has and good employment prospects, it is hoped that many in this situation will be able to resolve themselves.
However, worsening labor market conditions, especially a sharp rise in unemployment, could put more households in trouble this year.
Significant Savings Help Some Borrowers Solve Difficult Financial Situations
Many borrowers have significantly increased their mortgage prepayments on redrawing or offsetting accounts during the pandemic as interest rates have fallen.
Nearly half of borrowers have more than one year of repayments in their mortgage accounts. These borrowers have enough savings to cover income shortfalls for considerable periods.
* The number of months ahead, expressed as the number of months that the advance payment (including offsetting and redebit balances) can cover the minimum scheduled payment. Includes installments. Only loans with prepayment terms of less than 3 months are categorized by loan type. ** Includes variable rate and fractional owner loans launched from March 2020 to April 2022. Fixed rate and investor loans initiated in this period fall under the fixed rate/investor category. Source: RBA.securitization system
However, about 40% of borrowers have less than three months left on their mortgage payments.
Half of these are fixed-rate or investor loans, and they generally store their savings elsewhere, but 20% of borrowers appear to have little savings to fall back on if they run into trouble repaying them. .
Unfortunately, there can be significant overlap between these low-saving borrowers and those with negative excess cash flows after interest rates rise. These borrowers can quickly fall behind on their payments.
The good news is that lenders are working with these borrowers to try and get the best possible outcome for both the borrower and the lender so that the borrower can stay in their home.
In the worst case, almost all borrowers can pay off their loans by selling their homes
For some borrowers, higher repayments will be financially insurmountable. Unfortunately, they may need to sell their home. For these borrowers, rising prices over the past few years mean almost everyone can sell their property and pay off their loans in full.
Today, less than 2% of loans cover more than 90% of property value, and few people owe more than their home is worth.
* Loan balances adjusted for redrawing and offsetting account balances. Property prices estimated using the SA3 price index. ** Excluding LVR <5%.Source: ABS; Core Logic; RBA; Securitization System
Higher interest rates mean 16% of borrowers are ‘mortgage prisoners’ who can’t refinance
In order to refinance, the borrower must meet the conditions. Update maintainability ratingThis should include the current interest rate plus a buffer of 300 basis points to show that you can pay off your new mortgage repayments. This means that the borrower must be able to show that he can repay if the interest rate rises to 8.5-9%.
Already 16% of borrowers fail to meet this criterion and are unable to refinance to better terms.
*Loans that fail the utility evaluation to obtain a new loan equal to the current balance. Project income generation growth using Wage Price Index (WPI) growth and spending along the Household Expenditure Index (HEM).Source: ABS; Melbourne Institute; RBA; Securitization System
This could result in borrowers paying uncompetitive interest rates, putting them under even greater pressure.
was there Call to reduce the serviceability buffer, but a better solution is a “similar” repayment. Borrowers can move to a new lender without a new utility rating, provided they have not missed any loan repayments.
Recognizing that many borrowers are in this position, some lenders have begun offering this pathway to better interest rates and lower repayments.
2023 will be a tough year for many
The RBA’s analysis highlights that while most borrowers can cope with adjusting to rising interest rates, some will struggle.
The RBA has paused rate hikes for now, but rising interest rates, inflation and rising rents will make 2023 a tough year for many.