Thursday, May 12 2022

New analysis from Savvy has revealed that mortgage stress may be on the horizon for some – but things may not be as bad as they seem.

With a cash rate hike set for June 2022 by the big four banks, Savvy offered his thoughts on what will happen to mortgages this year.

According to Roy Morgan, around 584,000 mortgage holders were at risk of mortgage stress at the end of 2021 – but this is a near record low with mortgage stress down from the previous year.

Mortgage stress is generally defined as 30% of income spent on the mortgage.

This estimate stems from a number of government incentives, extended repayment holidays and other assistance provided during the pandemic.

Savvy CEO Bill Tsouvalas said with record levels of public debt now on the books, the government will be “reluctant” to bail out landlords so as not to push inflation even higher.

“What’s pleasing to note is that unemployment is at a near-record high, which should push wages up, especially in services where employers are scrambling to fill vacancies,” Ms. .Tsouvalas.

“Refinancing at a lower rate is also best to start as soon as possible. Because, with all the indicators pointing to rising inflation, rates will definitely start to rise.”

See also: Is it too late to settle your mortgage?

What will a 1% interest rate increase look like?

The average variable interest rate prevailing in Australia in December 2021 is 2.70% per annum according to figures from the RBA.

To illustrate what an interest rate hike could really mean, Savvy used a hypothetical example of a 0,000 mortgage with a 25-year term.

With an interest rate of 2.70% per year, monthly payments for this mortgage would be approximately $2,294 according to Savvy.

In this example, Savvy assumes that a couple has an average income of $135,720, which means that 20.3% of their income goes towards their mortgage.

With that in mind, Savvy explained what an interest rate of 3.70% per annum would look like for this specific scenario.

Interest rate Monthly repayment Supplement paid per year % of income towards mortgage
2.95% $2,358 $768 20.8%
3.20% $2,423 $1,548 21.4%
3.45% $2,490 $2,352 22.%
3.70% $2,557 $3,156 22.6%

Source: Savvy

If wages increased in line with inflation, it “may not be a big deal as it seems”.

However, wages rose 2.4% throughout 2021 according to the ABS, while house prices rose 4.2% in the December 2021 quarter alone.

Using the same example, if their salary increased by 2.3% throughout the year, they would earn $3,121.56 more per year. That means they would only have to find an extra $35 a year to meet the 100 basis point interest rate hike.

However, if the homebuyers don’t get any pay raises, they may have to come up with the above figure of $3,156 on their own.

If they were to see a reduction in their income, they would immediately be thrown into mortgage stress according to Savvy.


Fixed rate mortgages have been on the rise for many months now, with ANZ and Westpac announcing rate hikes of up to 90 basis points last week.

Compared to a year ago, some fixed-rate home loans are more than 200 basis points higher, adding hundreds of dollars per month to the average mortgage.

This despite the cash rate remaining at 0.10% since November 2020.

According to Savvy, homeowners saw an average interest rate decline of 62 basis points from July 2019 to July 2020 (3.85% in July 2019 and 3.22% per annum in July 2020).

A year later, interest rates fell another 35 basis points to 2.81% per annum

Investors could have saved, on average, 73 basis points from July 2019 to July 2020 (4.31% pa to 3.58% pa). Interest rates fell to 3.15% per annum in July 2021.


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Are you buying a house or looking to refinance? The table below shows home loans with some of the lowest interest rates on the market for homeowners.



Lender

Rate type Gap Redraw Ongoing charges The initial costs LVR Lump sum reimbursement Additional refunds Pre-approval

Variable More details
UNLIMITED WITHDRAWALSSPECIAL OFFER

Smart Booster Home Loan Discounted Variable – 2 years (LVR
  • Fast turnaround times, can meet 30 day settlement
  • For purchase and refinancing, down payment min 20%
  • No ongoing or monthly fees, add 0.10% compensation

Variable More details
100% COMPLETE CLEARING ACCOUNTNO APPLICATION FEES OR ON-GOING FEES

Low Rate Home Loan – Premium (Principal & Interest) (Owner Occupant) (LVR
  • No upfront or ongoing fees
  • 100% cleared account
  • Additional refunds + withdrawal services

Variable More details
ZERO APPLICATION FEESCOMPENSATION WITHOUT COST

Homeowner Accelerates – Celebrate (LVR
  • We lower your rate based on the amount you have repaid on your loan
  • Automatic Fare Matching
  • No upfront or ongoing fees

Variable More details
AN EASY DIGITAL APPLICATION
  • No ongoing fees – None!
  • Unlimited additional refunds
  • Easy online application, quickly find out if you are approved!
  • Redraw – Access your extra payments if you need them
  • Use the app for loan information to help you pay off your home loan faster

Careful variable real estate loan (capital and interest) (LVR
  • No ongoing fees – None!
  • Unlimited additional refunds
  • Easy online application, quickly find out if you are approved!
  • Redraw – Access your extra payments if you need them
  • Use the app for loan information to help you pay off your home loan faster

Variable More details
BENEFIT FROM A REDUCED GREEN RATE*
  • Low-Rate Home Loan with Extra Benefits, Added 0.10% Offset
  • Save Thousands of Dollars and Make an Eco-Friendly Choice on Your Loan for Homes Under 12 Months
  • Earn a NatHERS rating of 7.0 stars or higher for up to 1.79% off your variable rate home loan. Terms and conditions apply.

Green real estate loan (capital and interest)

  • Low-Rate Home Loan with Extra Benefits, Added 0.10% Offset
  • Save Thousands of Dollars and Make an Eco-Friendly Choice on Your Loan for Homes Under 12 Months
  • Earn a NatHERS rating of 7.0 stars or higher for up to 1.79% off your variable rate home loan. Terms and conditions apply.


Basic criteria: a loan amount of $400,000, variable, fixed, principal and interest (P&I) real estate loans with an LVR (loan-to-value) ratio of at least 80%. However, the “Compare mortgages” table allows calculations to be made on the variables selected and entered by the user. All products will list the LVR with the product and price list which is clearly published on the product supplier’s website. Monthly repayments, once the basic criteria are modified by the user, will be based on the advertised prices of the selected products and determined by the loan amount, repayment type, loan term and LVR as entered by the user. user/you. *The comparison rate is based on a loan of $150,000 over 25 years. Please note: this comparison rate is only true for this example and may not include all fees and charges. Different terms, fees or other loan amounts may result in a different comparison rate. Rates correct as of April 19, 2022. See disclaimer.


Image by Elisa Ventur on Unsplash

The whole market has not been taken into account in the selection of the above products. Instead, a reduced portion of the market was considered. Products from some vendors may not be available in all states. To be considered, the product and price must be clearly published on the product supplier’s website. Savings.com.au, yourmortgage.com.au, yourinvestmentpropertymag.com.au and Performance Drive are part of the Savings Media group. In the interest of full disclosure, Savings Media Group is associated with Firstmac Group. To learn how Savings Media Group handles potential conflicts of interest, as well as how we are paid, please visit the website links at the bottom of this page.

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