Small mortgage increase will hurt as outer suburbs struggle post-COVID

Thousands of households who used record-low interest rates to buy into the property market would struggle to survive a small increase in their mortgage repayments, new research shows with warnings people in Australia’s outer suburbs are struggling after COVID-19 lockdowns.

More than half of people say they would consider refinancing their mortgage if repayments increased $300 a month, the lift in repayments that would flow from a 1 percentage point rise on a loan of $572,000.

More than half of people surveyed by finance brokers suggest they would struggle from a $300 a month increase in their mortgage repayments.Credit: Peter Rae

The survey, carried out by research firm McCrindle on behalf of the Finance Brokers Association of Australia, suggests any move to lift interest rates to quell inflation will have to be small given the high level of debt carried by home buyers.

All major banks have started increasing their fixed lending rates as global borrowing costs rise on growing fears of a lift in inflation.

Earlier this year, each of the major banks had two-year fixed mortgage rates below 2 per cent while five-year loans could be locked in for under 2.25 per cent. Fixed rates have now increased by up to 0.75 percentage points.

Financial markets are betting the Reserve Bank, which has said it does not expect to lift interest rates until 2024, will have to move by the middle of next year.

The RBA and regulators are aware of the risk posed by rising interest rates. The Australian Prudential Regulation Authority now requires lenders to test the ability of borrowers to handle a 3 percentage point increase in repayments.

The survey found 57 per cent of more than 1000 people said they could not afford “at all” a $300 a month increase.

Among those with a gross weekly income of between $2000 and $3000, 46 per cent surveyed said they would struggle to meet such an increase.

Single parent families (80 per cent), those with a weekly income of between $700 and $1200 (76 per cent) and those in remote areas (71 per cent) said they could not meet a $300 monthly increase.

Finance Brokers Association of Australia managing director Peter White said Australians could have grown complacent as it had been 11 years since there had been an increase in official interest rates.

RBA governor Philip Lowe has repeatedly argued the bank does not expect the official cash rate to start increasing until 2024.Credit:James Brickwood

“Many Australians are clearly on the brink and are sleepwalking into disaster, living in the false hope that rates will stay this low,” he said.

“This survey is a wake-up call and shows that even a small rise in rates – which is looking more likely next year with rising inflation – could be catastrophic for our nation.”

Separate research by the National Growth Areas Alliance, which represents capital city outer suburban areas such as Liverpool in Sydney, Whittlesea in Melbourne and Logan in Brisbane, shows soaring house prices are a growing problem.

In the June quarter last year, 28 per cent of homeowners in outer suburban areas were worried about the impact of the pandemic on house prices. That’s climbed to 40 per cent. Among renters, it has climbed to 58 per cent from 31.

One in five people is struggling financially, with the highest proportion in NSW and Victoria (both at 26 per cent), lower income earners (28 per cent) and women (25 per cent).

Alliance chief executive Bronwen Clark said the federal government needed to create a minister for growth areas, so planning ensured a better distribution of infrastructure, jobs and housing in the capital cities.

She said the outer suburbs had borne the brunt of COVID-19 restrictions, especially in employment, which had fed into their financial issues.

“Our outer suburbs are home to the most essential workers and faced the strictest lockdowns,” she said.

“These are the communities that saw us through the pandemic and to date governments have failed to understand their needs. Now, governments must join the dots between high COVID rates, high outbreak risk factors and the lag is social infrastructure in fast growing outer suburbs.”

Data due from the Australian Bureau of Statistics this week is expected to confirm wage growth lagging inflation which is at 3 per cent due in part to soaring petrol prices and a lift in the cost of building homes.

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