Commonwealth Bank issues a warning to mortgage holders

According to a recent poll, if interest rates continue to rise and make it more difficult for borrowers to repay their loans, they may be compelled to sell their homes.Australian home borrowers could be forced to sell their home if interest rates kept on rising and made it harder for them to pay off their loan, a new survey has found (pictured is a Melbourne auction)

If interest rates increased by three percentage points, Finder believes that 145,000 homeowners, or around five percent of those with a mortgage, would be in this predicament.Financial comparison group Finder estimates 145,000 home owners, or about five per cent of people with a mortgage, would be in this situation if interest rates went up by three percentage points (pictured are houses in Melbourne)

Richard Whitten, an expert on house loans at Finder, said that more rate hikes to combat increasing inflation will compel struggling borrowers to sell in a declining property market.

He said, “After yet another hike in the cash rate, mortgage payments for many borrowers are greater than they were a few months ago and are certain to rise more this year.”

Through the remainder of 2022, many homeowners with variable-rate mortgages will likely suffer more, leading to an increase in defaults.

In May, June, July, and August, the Federal Reserve increased interest rates by 1.75 percentage points, the biggest rise since 1994.

The ANZ bank anticipates that the cash rate, which is now at a six-year high of 1.85%, will reach a 10-year high of 3.355% by November, with bigger rate increases of 0.5 percentage points in September, October, and on Melbourne Cup day.

The RBA ended the period of the record-low 0.1% cash rate in May, so borrowers would have seen 3.25 percentage point rate rises in just six months.

If this projection were to come true, a borrower with a $600,000 average mortgage would pay $1,060 more per month in repayments compared to May.

This borrower’s monthly obligation would increase to $3,366 from $2,306 in May.

Under Australian Prudential Regulation Authority standards, banks have been obligated to evaluate a borrower’s capacity to withstand a three percentage point increase in mortgage rates since November of last year.

ANZ and Westpac anticipate that the Reserve Bank would cease tightening monetary policy after the cash rate reaches 3.35 percent, but the 30-day interbank futures market anticipates a cash rate of 3.7 percent by April 2023.

The Finder study of 308 Australians with a mortgage revealed that 48% would have to reduce their expenditure, while 14% would struggle to pay their mortgage and expenses.

It was projected that 145,000 home-loan borrowers were the five percent who worried having to sell their house.

Negative equity occurs when a borrower owes more than their house is worth. Those in this scenario would be compelled to refinance in a dropping market, leaving them in this predicament.

The Commonwealth Bank, Australia’s largest mortgage lender, anticipates a 15% decline in national property values by 2023. The banks are now considerably harsher on borrowers with a debt-to-income ratio of six or above, APRA’s threshold for hazardous borrowers.

Australians who borrow the maximum amount permitted are no longer permitted to hold a credit card.

Moody’s Investors Service, a credit rating service, said that stronger standards were required to lower the danger of delinquencies, which occur when a borrower is at least 30 days behind on mortgage payments.

As interest rates and inflation increase, “stronger loan quality will offset heightened delinquent risks,” the report said.

Moody’s predicted that delinquency rates will rise modestly throughout the remainder of the year due to the impact of increasing interest rates and greater cost of living constraints on borrowers’ ability to repay debt.

In contrast, the credit rating agency determined that the average default rate for non-conforming loans, whose borrowing standards are not as stringent as those of the big banks, was between two and four percent during the last five years.

Taking into account the one-time impact of the implementation of the Goods and Services Tax (GST) in 2000 and 2001, the inflation rate for the year ending in June accelerated to 6.1%, the highest annual rate since 1990.

Treasury and the Reserve Bank both anticipate that headline inflation, often known as the consumer price index, would reach a new 32-year high of 7.75% by the end of 2022.