Rising rates have slashed more than 20% from the average borrowing capacity
More than one in 10 borrowers could find themselves in “mortgage prison” as interest rates continue to climb and house prices plummet, according to market analyst Jarden.
An estimated 10% to 15% of borrowers could become “mortgage prisoners,” finding it difficult or impossible to refinance thanks to reduced borrowing capacity and higher loan-to-value ratios, Jarden said.
The rise in interest rates is estimated to have slashed more than 20% from the average borrower’s lending capacity, according to a report by The Australian. At the same time, tumbling home prices may make it less attractive to sell.
Lendi group chief executive David Hyman told the publication that fewer people are looking to borrow their maximum with the threat of more rate hikes in the offing.
“The fact that prices have increased so much means the [number of] people being stuck because of their loan-to-value ratio is not going to be a huge part of the market,” Hyman told The Australian. “In aggregate, people are not borrowing at the top of the curve. But there definitely is a segment … who sit in that bucket whereby it’s going to be harder for them to refinance just because their borrowing power has decreased. Quite conceivably, someone who took out a 60% loan-to-value ratio [mortgage] nine months ago, they’ll find it difficult to refinance if they’re at the edge of their serviceability at that stage.”
Read next: “Loyalty tax” driving refi surge
About 45% of homeowners fixed their mortgages during the COVID-19 pandemic to take advantage of record-low interest rates, The Australian reported. The vast majority of those fixed mortgages will expire in the coming year, and many homeowners could see their rate spike by around 3%.
Refinancing activity reached a 20-year high in August, with $18.878 billion in new commitments. Those came primarily from owner-occupiers, according to the Australian Bureau of Statistics.
Cameron Kusher, director of economic research at PropTrack, told The Australian that the real impact of the rate hikes hasn’t yet been felt on consumer spending because more than double the average number of fixed-rate loans are currently in the marketplace.
Jarden analysts expect property prices to take a 15-20% tumble during the slowdown, which could cause an estimated 40% of loans to hit a loan value-to-home cost ratio of 80%, and 9% of loans to hit a ratio of 90%. Jarden said first-home buyers could be disproportionately impacted, as they usually purchase with lower deposits.
