Interpac Business and Migration Solutions Melbourne Australia

(May 6th, 2010)

MORE than 90,000 recent first-home buyers could be forced out of their homes because interest rates have risen faster than expected. They have been caught out by the Reserve Bank's increase in rates - yesterday's increase to 4.5 per cent was the third in three months and the sixth since October.

The hike means repayments on a $300,000 mortgage will increase by about $50 a month to nearly $2000, and economists are warning that there will be more pain. Many believe that rates will hit 6 per cent by the end of next year.

Exclusive data from leading financial services consultancy Fujitsu shows mortgage stress is affecting nearly 40 per cent of the 270,000 who have entered the property market since June 2008, The Daily Telegraph reported. The effect of the increase has forced some recent buyers to find second jobs.

Martin North, Fujitsu's consulting executive director, said that for 95 per cent of those in mortgage stress, selling was the only way out. He said there was a widely held view among participants in Fujitsu's research that rates would rise, just not this fast. Most had also expected wage increases to cover the rise in repayments. Now they've been caught short - a forced sale their fate. More than 32,000 New South Wales households are in this position, Fujitsu's data shows.

First will come increased reliance on credit cards, then attempts to refinance and reduce repayments. But this fixes the problem for only a few. "People who get in mortgage stress end up selling up. It's horribly predictable," Mr North said. So, too, that the numbers being forced out of their homes will rise along with rates. That would also result in mortgage stress seeping into the broader population, Mr North predicted. The tipping point, he said, would be if the RBA cash rate rose a further 1.5 percentage points. Which is precisely what many economists expect.

"We are seeing a cash rate of 6 per cent by the end of next year," Macquarie Bank economist Ben Dinte, and others, said yesterday. Also predictable were the actions of the big four banks, which wasted no time in saying they would add the entirety of the latest increase to their variable home loan rates. The highest variable rate among the quartet's is Westpac's at 7.51 per cent. Westpac is expected to post a half-year profit of as much as $2.9 billion today.

Opposition Treasury spokesman Joe Hockey said the Government had failed to keep interest rates down.

"For everyday Australians this is the head-high tackle they did not deserve," he said.

There was some good news for borrowers yesterday. Economists interpreted comments by RBA Governor Glenn Stevens as meaning there would be no rate hike next month. There may only be a couple more this year.

In a statement announcing the increase, Mr Stevens said that the RBA board "expects that, as a result of (this) decision, rates for most borrowers will be around average levels. This represents a significant adjustment from the very expansionary settings reached a year ago."

ANZ chief economist Warren Hogan said: "We expect the RBA to sit back and observe how the economy plays out for a few months." But Mr Stevens had added a warning on the longer-term outlook. "Australia's terms of trade are rising by more than earlier expected, and this year will probably regain the peak seen in 2008," he said. "This will add to incomes and foster a build-up in investment in the resources sector."

Economists took that to mean a string of rate rises were in store in 2011.

Mr North's predictions of spreading mortgage stress were supported by RateCity analysis, which showed that should the variable mortgage rate rise to nearly 9 per cent, the average NSW household with a standard-size loan would face mortgage stress.

Mortgage stress is generally defined as having to pay at least 30 per cent of income on home loan repayments.

(Source from:news.com.au)