Loan stress bad as GFC

RISING home loan interest rates could see borrowers fork out almost half their monthly income in mortgage repayments, in the worst housing affordability crisis in 20 years.

The crippling debt burden, and further house price falls, could also see borrowers form class action lawsuits against the banks for approving unsuitable loans during recent years of lax lending practices.

In its latest update on the Australian mortgage and bond market, global fund manager PIMCO warned that a 2 per cent increase in mortgage interest rates could force average repayments up from the current rate of 38 per cent of pretax income to 48 per cent.

“We expect mortgage serviceability will deteriorate further due to rising mortgage rates as well as the policyinduced switch from interest only to principal and interest loans,” PIMCO vice-president and lead author Taosha Wang said in the company’s Viewpoint note to clients.

“We estimate that a 200 basis point increase in Australian mortgage rates, a commonly adopted stress-test assumption at mortgage orgination, could increase mortgage payments from 38 per cent of pretax income to close to 48 per cent,” Ms Wang said.

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

PIMCO also said households should brace for further out-of-cycle interest rate rises, as overseas fund managers were expected to charge Australian banks a higher premium because of deteriorating housing conditions.

Falling house prices, rising debt-servicing costs, reduced household spending, weaker buyer demand, tougher prudential regulation, tighter mortgage lending criteria and closer regulatory scrutiny following the royal commission were expected to influence rates charged by overseas lenders.

“Mortgage rates are poised to rise because bank funding costs are heading higher,” Ms Wang said.

Digital Finance Analytics principal Martin North also warned the deteriorating housing market and repayment situation could see borrowers take legal action against their lenders.

“The current tighter lending practices now imposed on borrowers does not help the thousands who have been burdened with larger loans than they should have been given,” Mr North told Business Daily.

“The likelihood of class actions is real, as claims the bank made loans that were unsuitable come through.

“The 200 basis point test is a good indicator of the risks in the system because people are highly levered with bigger loans thanks to years of poor lending practice.

“Even small rises in rates will hit hard. We estimate that 1 million households are struggling to pay their mortgages each month – of the 3.3 million owner-occupied borrowing households. If rates rose 2 per cent this would rise to 1.25 million households.”

PIMCO also forecast further ratings agency downgrades for the Australian banks.