Anyone who has taken a mortgage before October of last year you don’t have a second to lose to stay safe and solvent.
Particularly if they borrowed or refinanced in the previous five or more years.
the Reserve Bank of Australia Official interest rate activity from the RBA, as it strives to stem the rise in consumer prices, has now added 250 basis points to most home loans.
Until October 6 last year, 250 basis points was the exact amount at which the affordability of a loan was tested.
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That means your lender only has stress test their ability to meet repayments in the exact amount to which they have already increased.
Which makes more rate hikes, the next of which may happen in just 14 days, a big deal.
Even those Australians who have borrowed or refinanced since the stricter lending criteria came into force on October 6, 2021 may only have a few months’ wiggle room.
Since that date, the loans have been stress tested at increases of 300 basis points.
Just two more official cash rate hikes, i.e. 50 basis points, could also put these mortgage holders in financial difficulty.
What is much worse is that, at that painful point, both groups could be trapped in a ‘mortgage prison’.
Pain rate to date
Rates have increased 10 times in six months, that’s 250 basis points in total. All uploads except the first and last uploads have been duplicated.
The nation’s largest lenders have now announced standard variable rates of seven percent or close.
Compare this with the situation of the last two years, until April of this year, in fact, when it was possible to obtain the best mortgage interest rate on the market of two percent.
It is when people have committed to large loans at these low interest rate levels that they may now be in trouble.
Note that the stress test, required by the Australian Prudential Regulation Authority, is designed to provide you with a budget buffer and prevent you from taking on too much debt.
The problem is that this cushion of affordability has vanished faster than anyone imagined.
Plus, you can’t refinance now unless you pass the new 300 basis point stress test, so the hurdle to getting approved this time is even higher than last time.
And from a higher interest rate base.
That’s where the danger of foreclosure prison comes in, being locked into an increasingly expensive mortgage.
How you can fight walks
All is not lost for your loan…if you act fast.
What is vital to realize is that the benchmark that was used in the first place, the repayment benchmark on which the 250 or 300 basis points were added, may well be higher than it should be.
That seven percent variable rate from the big banks? There are still comparable quality loans in the low four percent range.
So if you’re currently paying at that eye-popping level and you refinance to one of the most competitive offers, you have the extra 300 basis points needed to pass the stress test.
You have also shown it by paying for it.
But with each RBA decision, its borrowing power fades.
Research by RateCity shows that the average family with two children and a combined pre-tax income of $150,000 has seen their maximum possible loan size reduced by nearly $200,000 since the increase cycle began in May, from $995,800 to $800,300.
So if times are getting too tight but you’ve realized you’re paying interest well above the odds, you don’t have a second to lose.
Even one more rate increase could cost you your 300 basis point cushion and thus see you denied the refinance you need.
Which would put you in ‘mortgage jail’ which sounds appropriately horrible.
Once the door is slammed shut, there is no way out but economic hardship and, taken to the extreme, fire sale.
If you’re already stuck and can’t switch to a cheaper lender, the hope and expectation is that before long, the RBA will change direction and start cutting rates.
But those who are still free to move, even just for the next 14 days, can turn a potential foreclosure prison into a foreclosure gift.
Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook, Twitter Y Instagram.
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