Zip it, boomer! Just one more rise to go

Bruce Brammall, The West Australian, 13 March, 2023

Raise your hand if, in recent months, you’ve had a Boomer remind you their home loan interest rates were once 18 per cent.

If you have a mortgage, keep your hand up if you didn’t (a) swear at them, (b) kick away their walking frame, or (c) clench your fist and THINK about giving them an uppercut.

Many hands still up?

Boomers love to think their 18 per cent interest rates meant they had it wa-a-a-y harder than the current generation’s 6 per cent. It’s rubbish. I’ll come back and show you why soon.

But let’s start with the now. And some problems many homeowners might not have thought about yet.

Pain aplenty

We’ve had 10 rate increases. The first couple, really, didn’t touch the sides. Not too many were hurting by August/September.

But as each new rise gets added to the last one, the financial pain escalates. Those doing okay after the first 1 per cent, started to feel it a little more when the second per cent arrived. Their numbers grew again with the third per cent before Christmas.

We’re now deep into the fourth per cent.

The pain is incremental, like rising floodwaters. It slowly works its way up through various pain thresholds. While some, even many, are still okay, their numbers are dwindling.

Service this

For those in financial agony, here’s why.

When banks were lending new money a year or two ago, at 2.5 per cent, they would “test” potential borrowers to see if they could afford the mortgage if rates went to 5.5 per cent.

That 3 per cent difference is known as the “servicing buffer”. APRA determines the buffer. Banks follow orders.

But interest rates are now 3.5 percentage points higher, with more to come. Those who borrowed right at the bottom, up to their maximum, are having to make repayments their bank hadn’t “stress tested” them for.

Fuel the fire

Tip onto that the cost of living (your expenses) is 8 per cent higher than a year ago, and rising. Like pouring fuel on a fire.

The tentacles stretch deeper, for those finding things getting a bit hairy with their current bank.

They can’t refinance. And they can’t borrow more.

Why? Interest rates are 6 per cent. APRA’s servicing buffer is still 3 per cent. Therefore, a new bank will test you at 9 per cent.

If a bank sees you’re struggling at 6 per cent, you ain’t passin’ when tested at 9 per cent.

A $600,000 borrower is now paying $3597 a month. The bank needs to believe you could meet monthly repayments of $4827.

Stuck on you

So, if you’re already in pain … you are stuck with your current bank. And your bank is stuck with you. So long as you soldier on.

You can’t move away. They can’t get rid of you. It’s like two teenagers getting their metal braces entangled in a kiss at the dance. Awkward.

What can you do?

Hit up your current bank for a better rate, definitely. While rates have gone up, the discounts offered by banks have also been increasing, fairly rapidly, in the last year.

If you’ve got a mortgage broker, give them a call. They’re doing a lot of this at the moment. Or hit up your bank.

Nothing to lose.

Property price pain

Nationally, property prices are off about 10 per cent.

As above, interest rate rise damage is incremental and recent moves are yet to really be felt. “Servicing” crunches means fewer people qualify to borrow, with increasingly smaller amounts.

Nobody should kid themselves. We haven’t hit the bottom yet.

Boomers off tap

Right, let’s deal with the Boomers’ claims.

When Boomers’ interest rates got to about 18 per cent in 1989, they were rising off a base of about 11 per cent. (Different times, different monetary policy. Forget how small their mortgages were. Let’s look at percentages.)

From 11 to 18 per cent, their monthly repayments rose by about 54.8 per cent on then average 25-year loans.

In moving from 2.5 per cent to 6 per cent, today’s borrowers have seen a 51.7 per cent increase in monthly repayments on 30-year loans. One more increase and it goes to 55.8 per cent.

So, it’s about the same now. With one more interest rate rise, arguably, this generation’s borrowers are worse off.

Hey Boomers. Zip it.

Bruce Brammall is the author of Mortgages Made Easy and is both a financial adviser and mortgage broker. E: bruce@brucebrammallfinancial.com.au.