Borrowers facing ‘unchartered waters’, warns CoreLogic

Property data and analytics group CoreLogic has flagged the uncertainty that some home loan borrowers now face, following the Reserve Bank of Australia's (RBA) move to raise the official cash rate to 2.85 per cent on Tuesday (1 November).

The 25-basis-point hike marks the seventh month in a row that the cash rate has risen, as the central bank works to temper escalating inflation.

It means that the cash rate has risen by 275 basis points (2.75 per cent) since April 2022, when it was at its record-low level of 0.10 per cent (brought in as an emergency setting as a result of the pandemic and COVID-induced recession in Australia).

Old serviceability buffer levels now exceeded

Speaking after the RBA’s November cash rate decision, CoreLogic’s research director, Tim Lawless, flagged that many mortgagors now face “unchartered waters”, given that rates have risen so rapidly in recent months as other costs rise.

Mr Lawless explained that most banks had typically used a 2.5 percentage point buffer when servicing loans before October 2021 (after which time the prudential regulator told lenders it expected them to assess new borrowers’ at an interest rate at least 3.0 percentage points above the loan product rate).

However, given that the official cash rate had risen to over this level in the past seven months, many borrowers would no longer qualify for their loans.

Mr Lawless explained: “The cumulative 2.75 percentage point rise through the tightening cycle (since May) takes home loan rates above the 2.5 per cent serviceability buffer that was used before October 2021 and close to the current 3 percentage point serviceability buffer.

“November’s rate hike may leave some recent borrowers approaching uncharted waters with regards to their ability to service their loan; a situation made harder due to persistently high cost of living pressures that were unlikely to be factors at the time of origination,” he added.

While CoreLogic did not have figures around how many borrowers could be impacted, Mr Lawless noted that since the beginning of October last year (when the serviceability buffer changed), there had been just over 611,000 home sales.

Speaking to Mortgage Business, Mr Lawless added: "For those households that haven't budgeted for interest rates to go this high, then that's where they could be moving into some level of either mortgage distress, or budgetary pressures more broadly."

The research director noted that the cash rate is now 30 basis points above the pre-COVID decade average and at the highest level since April 2013. 

He said: “Arguably, households were far less sensitive to the cost of debt when interest rates were previously this high, with the ratio of housing debt to annualised disposable income roughly 17 per cent lower than it was in June 2022.

“If the full rate hike is passed on to mortgage rates, which is likely, the average variable mortgage rate for a new owner occupier loan is set to reach approximately 4.96 per cent, up from the April low of 2.41 per cent.”

He estimated that, based on a $750,000 loan amount and principal and interest repayments on a 30-year loan term, the rate hiking cycle to date has added approximately $1,079 to monthly mortgage repayments.

Borrowers need to start preparing now

However, Mr Lawless suggested that it would be unlikely that mortgage arrears would rise materially - even amid the high cost of debt and inflation - due to the current low levels of unemployment, which he suggested would likely “remain well below average levels”.

CoreLogic’s research director said he expected borrowers would therefore likely “pull back on non-discretionary elements of their spending in order to maintain their debt repayment obligations and pay for essentials like food, fuel and utilities”.

He told Mortgage Business: "For those households that can't really pull back on the discretionary spending - and are already finding their mortgage repayments and the cost of living expenses are at their limit - then clearly, something's going to break. Those particular households will be looking either for some forbearance from their lender, or they might be looking to refinance back to take interest-only payments (where possible)."

The real crunch point, he suggested, could be "about six months away" - as mortgagors who took out super-low fixed rates roll off their fixed terms.

"We're coming into a period - about six months away - where a lot of people will be moving off their fixed rate mortgages and probably onto a variable rate that's going to be well and truly more than double what they're currently paying," Mr Lawless told Mortgage Business, flagging that around 46 per cent of all loans issued in July 2021 were for fixed rates.

"Arguably, that's where we could start to see some more pronounced mortgage stress," he said.

CoreLogic's research director said that he hoped anybody who was moving towards that timeframe would be "starting to prepare their budgets for it now", speaking to a mortgage broker, or asking their lender for leniency.

"I don't think any lender wants to see their borrowers moving into a mortgage arrears or a foreclosure situation. So generally lenders will be cooperative in trying to support a borrower who can't make the repayments at least for a certain period of time. But ultimately, if, if the household recognises that they're not going to be able to stay on track with their mortgage repayments the best thing to do is probably act proactively," he said.

He noted, however, that while interest rates are rising at the fastest pace since the early 1990s, there has not yet been any signs of panicked selling or forced sales appearing in CoreLogic's monitoring of listings data.

“In fact, the flow of new listings remains substantially below what they would usually be for this time of the year.”

Mr Lawless continued: “The RBA notes interest rates are likely to rise further from here. With a higher cost of debt, the outlook for housing values and property market activity remains skewed to the downside.  

“Although the rate of decline in housing values has eased in some cities over recent months, we are expecting housing values to continue to trend lower until interest rates find a ceiling.”

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