Young, rich & heavily at risk from rising rates

by Miklos Bolza11 Jan 2017
Younger wealthier borrowers who have purchased homes in some of the country’s most expensive areas are potentially at risk of mortgage stress, especially given the likelihood of further rate rises this year.
These findings come from an analysis of more than 26,000 households by Martin North, principal of Digital Finance Analytics. In his research, North looked at the sensitivity of different demographics of owner-occupiers to a future interest rate rise.
If rates increased by 0.5%, North found that the “young affluent” demographic was most at risk of mortgage stress. Those in this group are owner-occupiers in pricier suburbs such as Toorak in Melbourne or Bondi in Sydney.
“Everyone focuses on Western Australia and Queensland but there is a much broader group of households that are closer to the edge and will find it difficult to cope if interest rates go up,” North told the Australian Financial Review.
The young affluent are most at risk because of the large-scale mortgages they have taken out for properties in the country’s most overheated markets. These borrowers typically make minimum payments, have static income and are highly leveraged.
“Although affluent, many at risk households are grossly over-committed, with little free cash,” North said. “They would be disproportionately impacted by even a small rise.”
In an interview with ABC News on Monday (9 January), North said the current low interest rate environment has led to an expectation that rates will remain low. However, this could be set to change.
“Those households with much larger mortgages are more leveraged. Essentially what that means is if rates rise even a little they will be significantly more exposed to pressures on their finances.”
With the young affluents typically buying into the property market quite recently, large mortgages and significant credit card debts mean they have no head room to deal with rising costs.
“What that means is that as those costs rise they’re going to find it harder to manage their budgets and some of them will perhaps miss mortgage repayments.”
While this wasn’t a dramatic situation, North said it was an important one to note.
“It’s quite unusual. We don’t often see it,” he told ABC News.
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