If you bought your home before October last year, you might find yourself in a very tight position, thanks to interest rate rises.
This is because, prior to October 2021, a bank could only give you a loan if it saw that you would be able to pay your loan even if interest rates increased by 2.5 per cent.
Thanks to yesterday's hike, interest rates are now up 2.75 per cent since May.
This means that rates are now at a higher level than where homeowners were stress tested at.
Those who got a loan after October last year were stress-tested at 3 per cent, after the Australian Prudential Regulation Authority (APRA) lifted the requirements.
“The cumulative 2.75-percentage-point rise through the tightening cycle – since May - takes home loan rates above the 2.5 per cent serviceability buffer that was used before October 2021 and close to the current 3-percentage-point serviceability buffer,” Corelogic research director Tim Lawless said.
“November’s rate hike may leave some recent borrowers approaching uncharted waters with regards to their ability to service their loan; a situation made harder due to persistently high cost-of-living pressures that were unlikely to be factors at the time of origination.”
APRA chair Wayne Byres said the stress test was designed to ensure the financial system remained safe and to make sure banks were only lending to people who could afford their loans.
Byres said this was a targeted and judicious action designed to reinforce the stability of the financial system.
“Increases in the share of heavily indebted borrowers, and leverage in the household sector more broadly, mean that medium-term risks to financial stability are building,” Byres said back in October last year.
“More than one in five new loans approved in the June quarter were at more than six times the borrowers’ income and, at an aggregate level, the expectation is that housing credit growth will run ahead of household income growth in the period ahead.”
What to do if you’re in mortgage stress
A quarter of mortgage holders could fall into mortgage stress if interest rates continued to rise, the RBA warned last month.
If you’re facing mortgage stress, first and foremost, shop around to see what other rates are on offer.
Loyalty can cost you and competition between the banks is your friend.
See what else is out there and try to get a better deal somewhere else or, if you see a better deal, try and use it as leverage with your current bank to get a discount.
This is not a time to be too polite to ask - the squeaky wheel gets the oil.
Beyond trying to get a new deal, speak to your bank regardless. There are plenty of options available for those facing financial difficulties.
And, if you are finding it hard to manage your finances in general, it’s time to update or make a budget.
Look at the money coming in and what is going out - shop around for a better deal on all your bills, not just your home loan.
It can seem like a tedious task but it is a better option than potentially having to sell your home.