As noted yesterday, a large proportion of mortgages originated in 2021 were at high debt-to-income ratios of six or above:
Aussie borrowers leveraged-up in 2021.
To add insult to injury, many of these buyers would have purchased at rock bottom fixed mortgage rates around 2%, as illustrated in the next chart:
With fixed rates soaring, and variable rates about to follow suit on the back of Reserve Bank rate hikes, the chairman of the Australian Prudential Regulatory Authority (APRA), Wayne Byres, has warned of a mortgage shock as fixed borrowers reset at much higher rates:
“Of particular note will be residential mortgage borrowers who took advantage of very low fixed rates over the past couple of years, and may face a sizeable ‘repayment shock’ (possibly compounded by negative equity) when they need to refinance in the next year or two”.
“We will also be watching closely the experience of borrowers who have borrowed at high multiples of their income – a cohort that has grown notably over the past year.
According to CBA head of Australian economics, Gareth Aird, around $500 billion worth of fixed mortgages are due to refinance by the end of 2023, many of whom would face a doubling in mortgage rates if the official cash rate (OCR) follows the median economist’s forecast.
Given house prices are also forecast to fall sharply over the same period, many of these mortgage holders would also face negative equity.
The seriousness of the fixed mortgage reset is one of the reasons why I do not believe that the Reserve Bank will hike the OCR as aggressively as most economists let alone the market are projecting. The impact would simply be too disastrous for households, the economy and the housing market.
