Mortgage brokers' warnings over future interest rate rises fall on deaf ears of desperate home buyers

Buyers borrowing ever-increasing sums of money to force their way into the red-hot housing market are being warned by mortgage brokers to be more cautious about shouldering massive debt.

Many are being told to imagine how they’re going to afford such crushing repayments if the interest rate rises to five or six per cent.

“But I’m hearing buyers saying so often now that money is so cheap, they’re going to borrow as much as possible,” said mortgage broker Justin Doobov of Intelligent Finance. “They’re saying, with interest rates now so low, it’s cheaper to make repayments on a mortgage than it is to rent.

“And with prices rising so quickly, it’s all being driven by FOMO. They want to get into the market before it slips away from them. We’re saying they have to look at the possibility of, say, a six per cent rate in five years’ time and, while most believe rates will go up, they see prices going up much faster, so they’re willing to take that risk.”

Although the Reserve Bank of Australia has just kept interest rates on hold at the rock-bottom 0.1 per cent for the seventh month running, most market lenders have increased the rates for longer fixed-term loans, and are expected to hike them further still in the near future.

Rates for four-year fixed-term mortgages from the big four banks are all now above 2 per cent, even while the Reserve Bank has indicated its base rate won’t move up until 2024. At the same time, however, house prices nationally rose a stunning 2.2 per cent in May, on CoreLogic figures, after a 1.8 per cent rise in April and a 32-year record 2.8 per cent rise in March.

As a result, the frenzy to get into the market before it spirals out of many people’s reach means some warnings from banks and mortgage brokers are falling on deaf ears.

“My concern is that, when the GFC happened, many people couldn’t afford their repayments on mortgages and their homes were repossessed,” said Mr Doobov. “With the pandemic, people put their mortgages on hold and the government threw money everywhere, which has taught people a bad lesson.

“They’ve started thinking that if they can’t afford to keep going, then the government will step in. So a lot of people now have the mentality of ‘She’ll be right!’ and if they’re not, then the government will help them out. I’m always concerned.”

FinVu director Gerard Hansen is also worried that many borrowers aren’t being realistic. He’s constantly warning them that, if interest rates go up to 4 per cent, then their repayments will effectively double.

“They’ve got to be mindful that they’ll have a massive amount of debt and if their incomes aren’t going to increase, or they’re going to have growing kids who cost more to feed, then they might struggle,” he said.

“But, personally, I don’t think people are listening. It’s going in one ear and out the other.”

Brighter Finance broker Marcus Roberts is also now constantly discussing the possibility of interest rates rising with his clients. He presents scenarios of repayments with rates of 3 per cent, then 4.5 per cent, and asks how borrowers would cope.

“A lot of people do borrow a lot of money, especially in a rising property market,” he said. “I wouldn’t be comfortable borrowing that much because, if interest rates do rise, you’re going to have to cut back on your lifestyle to afford to pay it back.

“We’re having a lot of conversations around that now, and I set out hypotheticals of what will happen if and when rates do rise. One client I saw yesterday looking to buy her first home agreed not to go forward after our conversation.

“She needs a wage rise and to pay off other debts before she can take up a mortgage. Yes, she might miss out on prices today but she’ll be better positioned in six to 12 months’ time to afford what she wants.”

But it’s difficult for eager home-owners to agree to put their plans on ice when they’re seeing such massive rises in prices almost daily. In Sydney, house prices have been soaring by $1220 a day, up 9.3 per cent in the past three months alone, with Melbourne up over the same period by 5.5 per cent, Brisbane 6.2 per cent, Adelaide 5.4 per cent, Hobart 7.7 per cent, Darwin 7.9 per cent, Canberra 6.5 per cent and Perth 3.8 per cent.

Mortgage Choice broker David Thurmond said he wouldn’t be doing his job if he wasn’t warning buyers about the need to be prepared for interest rate rises, and asking them to think about what discretionary expenditure they might be able to cut in that eventuality.

“But I’m finding the vast majority of clients are being quite responsible,” he said. “The people who phone and ask what’s the maximum they can borrow aren’t often the ones who end up borrowing. It’s the ones who have a budget and who are determined to stick to it [who] we see.

“It’s part of my job to be realistic and say interest rates will increase and talk about cutting expenses or having a savings buffer of $10,000 to $20,000, which will help.”

Mr Doobov said, however, that many buyers were optimistic and felt that strong price rises would continue to outpace any interest rate hikes.

“They say that expats might come back and foreign investors will return and further push up property prices,” he said. “They also believe their own incomes will go up.

“The government is basically fuelling the rising market with the incentives they’re offering so they should have a duty of care if borrowers get in and then can’t afford it.”