A new report published by illion reveals that the average Australian mortgage holder could be $15,000 worse off each year, with rising servicing costs and inflation pressures. This may lead to a much broader economic impact which could send Australia into a recession. New homeowners under 35 appear to at greatest risk. If they are forced to sell their homes as interest rates rise, they could face substantial debt and, in some cases, even negative equity, if house prices fall to pre-COVID levels.

Michael Landgraf, illion’s Manager of Bureau Analytics, describes the situation as “a perfect storm”. “The fear of missing out has led Australian borrowers to take on a substantial debt burden,” Mr Landgraf said. If property prices drop to 2019 levels, this would result in these borrowers holding “next to no equity” in their property, Mr Landgraf notes. “If we included the buying and selling costs of the property (e.g. agent fees, stamp duty on the land value – estimated as 6%) the residual equity would be 2% of the property’s selling price,” he said. “Therefore, if rising interest rates were to lead to forced property sales, borrowers would be left with limited funds for rebuilding their social stability (e.g. the rental of a property).”

This situation looks even more precarious in regional Australia, where borrowers could be left with a 5% residual debt post-sale. These borrowers would be left to service an outstanding debt without owning the underlying asset, while also needing to find the financial means to manage their life. Borrowers who aren’t forced to sell their property could also be facing a substantial impact on their household budget, as interest rates and living costs rise.

illion found that, on average, Australian borrowers who took out a mortgage in 2021 needed an additional $500 per month by the end of 2021 in order to meet rising living costs and service higher mortgage debts.

“A mortgage interest rate-rise of 2.5% over 2022/23 would deplete the monthly household budget by a further $760,” Mr Landgraf said.
In this scenario, borrowers would need to find an additional $15,000 per year to meet these costs, which were unaccounted for when they took out their loan in 2021.

For many, spending on luxuries such as dining out, entertainment and travel would disappear almost completely, while spending on groceries would need to halve to cover rising costs. “Clearly, the financial wellbeing of each household will depend on their available level of savings and income, otherwise the borrower of 2021 may suffer a substantial fall in living standards beyond 2022,” Mr Landgraf said.

The report goes on to identify which Australian groups are likely to be under the highest threat of financial stress, while attempting to determine whether they will be able withstand an economic shock.

The full report can be downloaded here.

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