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Mortgage repayments could surge to NEARLY HALF your income

Buckle up, homeowners, the amount you spend on your mortgage could rocket from 38 per cent to nearly half of your annual income.

With an interest rate increase of just 2 per cent, homeowners’ income spent on their mortgage would jump from an average 38 per cent to 48 per cent

Also read: Warning: Houses in this city will fall $80,000 by 2021

That would bringing housing affordability close to its worst level in the last 20 years, analysts at investment manager, PIMCO have warned.

“It is not news that Australian housing affordability is stretched,” Taosha Wang, Jing Yanh, Emmauel S. Sharef and Aaditra Thakur said.

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“The country’s total housing debt stands at 140 per cent of gross disposable income and mortgage payments are 38 per cent of median pre tax income.

Also read: Are the Big Four banks the next Telstra?

“We expect mortgage serviceability will deteriorate further due to rising mortgage rates as well as the policy-induced switch from interest-only to principal-and-interest loans.”

Banks poised to hike rates

Several major and smaller lenders have already begun to hike rates out-of-cycle, usually citing overseas funding pressures.

This will likely only get worse, the analysts said.

As Aussie banks rely on overseas funding, these costs are influenced by both domestic and international interest rates and monetary conditions.

“We believe U.S. dollar liquidity will continue to tighten globally and investors may start demanding higher credit premiums from Australian banks, especially if investors grow more concerned about downside risks to Australian housing,” they explained.

Also read: Reserve Bank hands down rate verdict

“As a result, the probability of out-of-cycle mortgage rate hikes in Australia has gone up. In fact, three of the country’s four major banks have recently raised their benchmark mortgage rates by about 15 basis points (bps) even though the RBA has held its policy rate constant.”

They noted that a 2 per cent, or 200 basis point, rate increase is usually factored into borrower stress-tests when they’re applying for the initial loan.

Nevertheless, “A 200 bps increase in Australian mortgage rates… could increase mortgage payments from 38 per cent of pre tax income to close to 48 per cent.

“This would bring the affordability gauge near its worst level over the past two decades, similar to that during the global financial crisis.”

Prices to fall but a severe crash is unlikely

In line with the prevailing market outlook, the PIMCO analysts predicted continued housing falls of around 10 per cent for the next few years.

However, a severe housing crash is unlikely thanks to a steady flow of supply and demand.

“An international comparison also suggests that Australia lacks the preconditions for a housing market crash,” they said.

“Key drivers of the U.S. housing crisis a decade ago – such as rapid accumulation of significant oversupply, compromised (sometimes fraudulent) underwriting practices and elevated leverage related to home equity and second line loans – are absent.

“Australian mortgages are also full recourse with a strong social stigma attached to defaults.”

Also read: Mortgage rate hikes: How much will it cost you?