Australia’s debt crisis is so bad more than 260,000 borrowers are set to see their mortgage repayment levels surge by $6,300 next year.
Those who took out an interest-only loan in 2015 are set to be squeezed as they are forced to pay principal and interest in 2020 – as house prices in some parts of Australia continue to fall.
For five years, Australians with an average mortgage of $400,000 were paying $1,500 a month on repayments.
Australia’s debt crisis is so bad more than 260,000 borrowers are set to see their mortgage repayment levels surge by $6,300 next year. Those who took out an interest-only loan in 2015 are set to be squeezed as they are forced to pay principal and interest in 2020 – as house prices in some parts of Australia continue to fall (stock image)
From next year, that is set to surge by 35 per cent to $2,027, Digital Finance Analytics principal Martin North calculated.
This $527 difference in monthly mortgage repayments would add up to $6,324 a year, based on someone having a 30-year loan.
At their peak four years ago, interest-only loans with five-year terms made up 40 per cent of Australia’s home mortgages, with the product particularly attractive to investors.
Making matters worse, house prices are still falling in certain parts of Australia, despite recent recoveries in Sydney and Melbourne.
This means struggling borrowers owe more than their home is worth – a situation known as negative equity.
Despite interest rates being at a record low, many borrowers are behind on their mortgage repayments by 90 days.
The Reserve Bank of Australia is particularly worried about Perth, where house prices have dived by 8.6 per cent during the past year, with CoreLogic data showing the five-year downturn is worsening.
Deputy governor Guy Debelle said borrowers who took out interest-only loans five years ago were particularly vulnerable as they were required to now start paying off principal and interest.
The Reserve Bank of Australia is particularly worried about Perth (pictured), where house prices have dived by 8.6 per cent during the past year, with CoreLogic data showing the five-year downturn is worsening
‘In Western Australia, around half of loans that were originated on interest-only terms and are in arrears also have negative equity,’ he said on Friday in a speech about mortgage arrears.
Mr North said the situation of negative equity wasn’t confined to Western Australia, with parts of Sydney still affected by the recent downturn.
‘My estimation of the amount of negative equity in the system is double, at least, what the Reserve Bank is saying,’ he told Daily Mail Australia on Monday.
While Sydney house prices have been recovering every month since mid-2019, the Central Coast an hour’s drive north is struggling, with house prices diving by eight per cent during the past year to be one of the worst markets in Australia.
Digital Finance Analytics principal Martin North (pictured) said Australia’s debt crisis was likely to worsen as the growth in borrowing outstripping wage increases
Mr North said prices in western Sydney were 15 to 20 per cent below the peak of 2017, even if values have recovered in the richer areas on the North Shore and the eastern suburbs.
‘Not all postcodes are going up, there are many postcodes in Western Australia that are down but also in New South Wales and Victoria too,’ he said.
‘Therefore, the negative equity story is considerably worse than I think the Reserve Bank is actually saying.’
Australia’s household-debt-to-income ratio already stands at a record 190 per cent, which is second only to Switzerland.
Average debt levels are growing by 3.1 per cent a year, far outstripping the lacklustre 2.2 per cent increase in wages in the year to September.
‘It’s quite likely we will continue to see household debt rising,’ Mr North said.