A million Australians could soon be paying $7,000 extra a year on their home loan as their monthly repayments surge by up to 40 per cent.
Household debt levels have also reached a new record, with Australians among the world’s most encumbered borrowers.
The popularity of interest-only loans peaked between 2014 and 2016, when they comprised four in 10 mortgages.
In coming years, the five-year interest-only periods of these loans are set to expire, depriving borrowers of relief even though interest rates are at a record low.
This will see about one million borrowers start paying principal and interest on their mortgages in coming years, as house prices in Sydney and Melbourne continue to fall and other property markets start to soften.
A million Australians could soon be paying $7,000 extra a year on their home loan as their monthly repayments surge by up to 40 per cent (pictured is a stock image of a financially-strapped couple)
Digital Finance Analytics founder Martin North calculated that a borrower with a $400,000 loan would see their monthly repayments surge by 30 to 40 per cent.
The conversion of their loan from interest-only to principal and interest would see them paying an extra $7,000 in mortgage servicing costs, on average.
Mr North, an economist, estimated 200,000 borrowers would face ‘some sort of existential crisis’ with $120billion worth of interest-only loans converting to principal and interest during the next year alone.
In the most severe cases, 35,000 owner-occupier and investor borrowers would be forced to sell their home, as they struggled to find another lender who was prepared to refinance their loan.
‘They may have a significant problem, that group will really struggle,’ he told Daily Mail Australia on Friday.
‘Some of those will find it very difficult to get any sort of loan so that 30,000 to 35,000 will be the ones that effectively get stuck.
The popularity of interest-only loans peaked between 2014 and 2016, when they comprised four in 10 mortgages. In coming years, the five-year interest-only periods of these loans are set to expire, depriving borrowers of relief even though interest rates are at a record low (pictured are Brisbane houses)
‘In that situation, it won’t be feasible to convert, they’ll probably have to sell their property.’
Making matters worse, Australia’s household debt-to-income ratio has now surged to a record 190 per cent, new Reserve Bank figures show.
‘Households have more of their income aligned to debt than ever before,’ Mr North said.
A TALE OF EIGHT CITIES
Sydney, down 11.6% to $869,579
Melbourne, down 12.6% to $708,523
Brisbane, down 2.3% to $531,047
Adelaide, up 0.2% to $465,625
Perth, down 8.7% to $459,823
Hobart, up 3.8% to $478,485
Darwin, down 6.4% to $462,984
Canberra, up 3.4% to $658,407
Source: CoreLogic median house values in the year to May 31, 2019
‘That’s a record. We’ve now reached a new high point.’
After Switzerland, Australia has the world’s highest personal and business debt levels.
‘What it signals is that whilst incomes are not growing very fast, household lending for mortgages is still growing faster,’ Mr North said.
‘That’s very much linked to the high home prices and the fact that the banks’ lending standards were very weak for a long period of time.’
Australians on an average full-time salary of $83,500 are already paying 40 per cent of their take-home pay servicing a $400,000 loan.
‘People are spending more, not just more on a debt-to-income ratio, but on a servicing-the-loan ratio as well,’ Mr North said.
‘More people have a mortgage for longer so more people go into retirement with a mortgage.’
During the past two decades, the proportion of Australians who owned their home outright has plummeted from 40 per cent to 30 per cent, Australian Bureau of Statistics figures released this week showed.
Since 2017, Sydney’s median house price has fallen by a record 17.4 per cent after the Australian Prudential Regulation Authority cracked down on interest-only loans.
Melbourne’s equivalent values have fallen by 14.8 per cent, CoreLogic data showed.