Mortgage holders are ‘on the brink’, FBAA warns

The latest data from the Finance Brokers Association of Australia (FBAA) has found a large percentage of Australians with a mortgage, as well as those who are renting, are cutting back on spending.

The 2023 report ‘Australian mortgage and rental affordability survey’ conducted by research firm McCrindle revealed that mortgagors are being forced to cancel holidays, sell assets, take on additional work, cut back spending on groceries and social activities, withdraw savings, and in the case of renters, move to cheaper rental properties.

Of the 1,074 Australians (aged between 18–77) surveyed, 83 per cent said the rising interest rates and rental prices were putting pressure on their financial position, compared to 75 per cent (in November 2021) who believed rising interest rates ‘would’ impact their financial position.

However, for Australians grappling with a mortgage, 94 per cent are concerned with rising interest and needing to take action.

Managing director of the FBAA, Peter White AM, said the government and lenders knew this was coming, but many Australians were “living in false hope” that rates were going to stay low.

“Somewhere along the line there was a failure to prepare Australians who had become complacent after more than a decade without seeing any rate rises,” Mr White said.

“We are sadly now seeing the results.”

The report highlighted 22 per cent of mortgage holders are now considering refinancing, with 16 per cent already refinanced since the rate hikes began.

On the back of the uptick in refinances and lending tightening, Mr White said a significant percentage of mortgages were now being written by second-tier and non-bank lenders.

“These lenders can be very competitive, and can also be more flexible which often suits for example small business owners with varying incomes, or those with past credit issues,” Mr White said.

“There are many more options available through mortgage brokers, and brokers are bound by law to act in the borrower’s best interests.”

The report also found 61 per cent of mortgage holders have cut back on weekly spending (including groceries) and leisure activities, while 37 per cent have cut back on holiday plans.

In addition, 27 per cent had withdrawn funds from their offset or savings accounts, while 19 per cent were considering this.

Call to lower serviceability buffer

While the Australian Prudential Regulation Authority (APRA) has confirmed the 3.0 per cent loan serviceability buffer was “appropriate”, the FBAA is calling for the authority to reassess its position.

The loan serviceability measures were changed in 2021, when the cash rate was still at its emergency pandemic settings of 0.10 per cent and record numbers of Australians were buying property with mortgages. In October 2021, APRA raised the loan buffer, telling banks it expected them to assess borrowers with a buffer of 3.0 per cent (up from 2.5 per cent).

Mr White explained that the current serviceability buffer makes it harder for mortgage holders to refinance and negotiate a better rate.

“More borrowers are becoming ‘mortgage prisoners’, locked into a situation where they can’t access a better deal because they don’t meet the inflated assessment rate,” Mr White said.

“A 3 per cent buffer was appropriate in the past because interest rates were at an all-time low and were always going to rise significantly, and this protected both the banks and the borrowers, but we can’t live in the past and a buffer of 1.5–2 per cent is far more appropriate today and in the near future.”

Mental health taking a toll

In what “should ring alarm bells across the nation”, the survey also found that the personal, social, and mental health impacts on borrowers were also taking a toll, with 50 per cent experiencing increased stress.

For Australians with a mortgage, the report revealed 48 per cent felt uncertain about the future and 40 per cent said their mental health had been affected.

Indeed, the impacts of financial pressure and increased stress were being felt in the household, with 26 per cent reporting tension in their relationships with a spouse or partner.

Mr White, who has led mental health initiatives for the finance broking industry, said that these findings showed that Australia is facing both a financial and mental health emergency.

Given interest rates are likely to continue increasing and many borrowers on fixed-rate loans were due for rate hikes, when their contracts roll over, “more pain was to come”, Mr White said.

“It will take a combined approach by government, lenders and the community at large to help people through this,” Mr White said.

He urged people to look ahead and seek assistance “before the lender comes knocking and you are forced to.”

“Call your bank, mortgage broker or landlord the moment you are concerned that you may not be able to handle the increased payments. Lenders can often help and mortgage brokers have many options,” Mr White said.

“And if you feel that you can’t handle the pressures please seek help from a health professional.

“This is a time to look after one another.”

[Related: RBA resumes rate rampage]