Interest rate: monthly mortgage payments are increasing, which shouldn’t happen
As interest rates rise, a big flaw is revealed in the way Australia has been granting mortgages. How could this have happened?
Interest rates rose from 0.1% to 0.35% on Tuesday and it’s potentially the start of a very long and scary road for all Australians who took on huge mortgages when rates were low .
It has been predicted that rate hikes could happen every month this year and if they get too high, up to 300,000 people could be in mortgage trouble and unable to pay their mortgages.
It’s the worst situation, but it’s also entirely possible.
For example, if you have a $500,000 loan and rates go up 0.15%, that’s going to be $40 more a month, which quite frankly, if you can afford a house, you should be able to stretch.
However, take that rate up to 2% and it’s $567 more per month… which suddenly feels a lot heavier.
For me, the anxiety Australians are beginning to feel is reminiscent of that of the UK in 2008 when the Global Financial Crisis (GFC) hit. I just hope Australia doesn’t end up on a similar path.
Don’t get me wrong, this is a very, very different situation than the GFC. Rising interest rates in Australia are something to be expected, something we knew would happen and were warned about. Although the Reserve Bank told us it wouldn’t be until 2024.
The GFC was primarily caused by people in the United States receiving what are known as “subprime” mortgages, which are usually given to low-income people. They have higher interest rates and can increase over time. When people failed to repay these mortgages, it had catastrophic global consequences that came as a huge shock to most of those affected.
One thing is similar though. It is ordinary low-income people who have suffered the most in the GFC – people who had been approved for mortgages they should never have received – and as interest rates rise in Australia, this will be those people who will run out of money. once again.
I was in my twenties when the global financial crisis hit the UK. Shortly after college and optimistic about finally making money, I was brutally slapped when the GFC arrived.
I was fired (twice) and when I got a long term job I had a salary freeze that lasted five years. Luckily, I didn’t own a house at the time, otherwise I probably would have had to file for bankruptcy.
I’m not going to lie, it was a dark time. It was particularly grim in fairly deprived areas like Nottingham where I lived, where people had been encouraged to take out 100% no deposit mortgages.
People defaulted on those mortgages and home values plummeted as banks sold properties trying to get their money back. “For sale” signs flooded the city, especially in areas where cramped new construction had been launched by greedy developers wanting to maximize the fact that everyone seemed to be able to buy a home, regardless of income.
These people had been sold the dream of home ownership and the banks had lent them the money. They hadn’t been greedy or lied about what they were earning, they had been offered these deals by prestigious financial institutions who should have known better.
Many fingers were pointed at who was to blame. In the end, the British public blamed the banks, but there did not appear to have been any real consequences for them.
Going through the GFC at such a young age left me with a lingering fear of one day not being able to pay my mortgage. I swore never to buy a house with less than 10% down payment and never to have a mortgage greater than five times my income, tempting as that was.
That’s exactly what many Australians have done – they’ve bought homes they may not be able to afford if interest rates rise.
They’ve taken money out of their superannuation, taken out interest-only mortgages and taken out huge loans that are affordable right now, but it could be a very different story by Christmas if the cash rate hits 2%.
Over the past two years, APRA data shows that 280,000 individuals or households received mortgages at more than six times their income and/or with a high loan-to-value ratio, meaning they are running a huge risk of mortgage stress.
If interest rates were always going to rise, why could this have happened?
If 300,000 Australians end up defaulting on their mortgages, it will be shameful for Australia. Shameful because they probably should never have received the mortgages in the first place.
Home ownership is part of the Great Australian Dream and everyone should be able to achieve it, but not at the cost of losing everything they own.
Riah Matthews is the editor of news.com.au.