The risk of credit default, as inflation and interest rates rise, is highest among borrowers who refinanced recently, especially if they are under 35, according to new research.
Credit bureau illion has released its latest Mortgage Nation Report, which says others at high risk include recent borrowers in western Sydney, south-western Sydney, outer Brisbane, Perth, North Adelaide and parts of regional Australia.
illion said a propensity to refinance suggests a need to gain access to housing equity and hedge against rising interest rates. It also appears that borrowers refinancing are more likely to have been refused additional credit by their previous lender.
illion said a property price correction back to 2019 levels would result in the average borrowers from mid-2021 onwards losing significant amount of equity if forced to sell.
Pre-COVID the average Sydney property price was A$875,000, with the average debt $670,000. By the end of 2021, Sydney borrowers increased their debt to $750,000 and needed a deposit of $275,000.
“As such, Sydneysiders need 30 per cent more deposit but take on 12 per cent more debt, when compared with two years ago in order to afford the same home. In Melbourne, the situation is a little easier; borrowers require 18 per cent more deposit but still take on 12 per cent more debt.”
A fall in prices back to pre-COVID levels would mean that a borrower with a $750,000 loan would only recoup $125,000 from the sale of the property, after including all costs.
“This would severely dent the $275,000 deposit invested in the property.”
Looking at the likely increase in monthly expenses, illion calculated that borrowers who took out a mortgage in 2021 needed an additional $500 a month by the end of last year to meet rising living costs. Mortgage rate rises totalling 2.5 per cent over 2022 and 2023 would add $760 a month to mortgage servicing costs.
Between the September quarter in 2020 and the December quarter 2021, the average new housing loan increased by 15 per cent to around $600,000.
Assuming an average salary of $110,000 in Sydney, where the average new mortgage exceeds $750,000, a Sydneysider who took out a home loan in 2021 was committing 45 per cent of net salary to servicing the debt. If rates rise to 5 per cent, the borrowers would be committing 58 per cent of net salary to service the debt.
Another feature of the home buying and borrowing trends of the past couple of years is growth in demand by young borrowers. Since March 2020 there has been a 60 per cent growth in the number of 35 to 44 year-olds taking out housing loans. That growth has outpaced all other demographics.
illion speculates that this is a result of young people receiving funds from the “bank of mum and dad”.
“If this is the case, the consequences to broader economic growth may be significant. Funds that would otherwise be available for consumption and retirement savings would instead be tied up with servicing and guaranteeing debt,” illion said.