By Alice Uribe
Mortgage holders who bought homes in 2023 and were hit with successive interest rate hikes are feeling more repayment pressure than those who took out home loans even a few years prior.
The Reserve Bank in February cut interest rates for the first time in four years after making 13 hikes from rock-bottom levels. Through 2023, the central bank raised rates multiple times, breaking the rising cycle in February when it cut the cash rate by 0.25 per cent to bring it down to 4.1 per cent.
Managing mortgage stress has been an issue for home owners who bought when interest rates rose. Credit: Rhett Wyman / SMH
It kept steady at 4.1 per cent on Tuesday amid uncertainty around US President Donald Trump’s tariff agenda. More cuts are likely in 2025, albeit at a gradual rate.
For those who bought at the peak of the rate rising cycle, grappling with mortgage stress has been a key issue. These borrowers were met with the combination of rising rates and house prices starting to rise again after their 2022 slump.
“A lot of people through this time of lowest to rising rates were purchasing at their maximum capacity,” Anthony Landahl, managing director at mortgage broker Equilibria Finance, said.
“What we’ve been seeing is those people who bought in that period of rising rates, in that period of rising house prices, once the rates reached their peak, repayments had gone up significantly.”
Mortgages with payments more than 30 days overdue from RMBS transactions issued in 2023 were higher than previous years, according to Fitch Ratings Australian Mortgage Market Dinkum RMBS Index Monitor for last quarter.
“Transactions that were issued in 2023, which are predominantly made up of loans originated in the same year, currently have slightly higher arrears than transactions that were issued in 2020, 2021 and 2022,” said Timothy Groombridge, director, structured finance at Fitch Ratings, who attributed this to partly to borrowers experiencing multiple rate hikes shortly after loans were taken out.
The 30-plus day arrears for 2023 transactions stood at 1.2 per cent one year after closing, against an average of 0.5 per cent for all other transactions issued in other years at a comparable time, according to Fitch Ratings data, although they remain low overall.
Borrowers who bought as rates ticked up did not have time to build up savings buffers.
Home borrowers are under pressure.Credit: Flavio Brancaleone
“We all came out of COVID with really high savings,” said PRD Real Estate chief economist Dr Diaswati Mardiasmo.
“And then cash rate hikes happened, which started to erode our savings, which meant that people who did buy in 2023 went into the market with less savings than, say, people who bought in late 2020 or early 2021.”
To meet the pressure of higher interest rates and depleted savings, some home owners were looking at downsizing. MortgageWorks director Anthony Roddy pointed to an example of a client who bought a home in 2023 and was selling that and purchasing a smaller property to reduce the burden of repayments.
“They will still have a mortgage, but it’s a significantly reduced burden,” he said.
Offloading investment properties was another strategy that home owners were using to stay afloat, mortgage brokers said.
“People have been trying to hold on to their owner-occupier property. We have had some cases where people have had to sell an investment property,” Landahl said.
Roddy said he had clients who had “taken the opportunity to sell an investment property and dump a large lump sum into their offset account”.
More affluent home owners were also considering offloading investment properties, said Matthew Mohl, head of private clients at mortgage broker Alcove, who had seen instances in which four investment property portfolios were reduced to three, along with changes to recreational spending.
Other home owners had been looking at restructuring loans, with some going to interest only, said Roddy, while the bank of mum and dad was also providing help.
“In terms of actually flipping houses or fire sales … We’re fortunate we haven’t seen too much of that I would say,” he said.
“I’ve no doubt in my mind that a lot of my clients have gotten through this period due to, whether it be interest-free loans from parents or lump-sum early inheritance-type scenarios,” he said.
Despite Fitch Rating’s recent data showing pressure on those RMBS mortgage transactions issued in 2023, Groombridge said he expected “arrears across all transactions issued in other years to decrease in 2025 as interest rate cuts take effect and unemployment remains low”.