Interest rates soar: One in four Australian homeowners face mortgage distress

After five months of outrageous rate hikes, 942,000 Aussies were at risk of mortgage distress and that number is set to rise with another rate hike expected in October.

The Roy Morgan study found that 20.8 per cent of mortgage holders – or one in five – are currently facing mortgage stress after a series of rate hikes caused the official cash interest rate to rise from a record low of 0.1 per cent in April 2.35 percent fell in September.

This is the highest number of mortgageholders classified as at risk in over three years since May 2019.

However, if interest rates are raised in October and November as predicted, that number will rise back up to one in four mortgage holders under financial stress.

It also comes amid warnings that house prices could collapse by as much as 43.5 percent in 2025 in a “worst-case scenario” if outsized interest rate hikes continue to try to deal with the country’s worst inflation in three decades , according to a new analysis .

This could mean the median house price in Sydney would fall to $796,650 from its peak of $1.41 million in 2022 — a fall of $613,350 in just three years.

The number of households in mortgage stress increased by 88,000 from July to September.

If interest rates now rise again by 0.5 percent in October, as forecast, the base rate would rise to 2.85 percent. It would be the highest rate since May 2013.

And if the Reserve Bank of Australia (RBA) hikes interest rates by 0.5 per cent for the next two months, it would mean nearly one in four mortgage holders would be at risk of mortgage distress, equivalent to 1.1 million people. Roy Morgan research found.

That would be the majority of mortgageholders classified as at-risk since July 2013, just over nine years ago.

Roy Morgan defines mortgage stress as repayments of more than 25 to 45 percent of household income.

Roy Morgan CEO Michele Levine said mortgage stress is mounting throughout 2022 as the RBA embarks on its first cycle of rate hikes in over a decade, but still remains below long-term averages despite five straight monthly hikes in September.

“Official interest rates are at 2.35 percent, the highest in over seven years since early 2015,” she said.

“Even so, with just over one in five mortgageholders classified as at-risk at 20.8 percent as of September 2022, mortgage stress levels are still below the long-term average over the past 15 years of 22.7 percent of mortgageholders classified as at-risk have been classified risk since October 2007.

“Looking ahead, RBA Governor Philip Lowe has stated that there will be more rate hikes over the next few months.”

Roy Morgan modeling shows that with two additional rate hikes of 0.5 percent in October and November, the number of mortgage holders classified as vulnerable would increase by 158,000 to 1.1 million – the highest since July 2013, she said.

“More worrying is the surge in mortgageholders classified as extremely vulnerable, estimated at 620,000 in September 2022 – the highest since May 2019, before anyone even heard of the coronavirus or Covid-19,” she said.

Borrowers with fixed-rate home loans maturing in the coming months could face mortgage stress by Christmas, experts warn.

Finder analyzed data from the Australian Bureau of Statistics and found that $158 billion in fixed-rate mortgages due to expire by the end of 2023 could increase repayments by up to $10,872 a year on average.

But Ms Levine added it’s important to keep in mind that interest rates are a factor in determining whether a mortgage holder is considered at risk.

“The variable that has the biggest impact on whether a borrower falls into the at-risk category is related to household income — which is directly related to employment,” she said.

“These numbers suggest that as long as employment levels remain high, the number of mortgageholders classified as vulnerable will not rise anywhere near to the levels recorded during the global financial crisis in 2007-2009, when well over 30 percent of the Mortgage holders were considered at risk – including a spike of 35.6 percent in May 2008.”

However, economists fear Australia could be headed for a recession as global markets face a meltdown.