Markets widely anticipate another rate rise anywhere between 0.25 to 0.50 percentage points today.

Markets widely anticipate another rate rise anywhere between 0.25 to 0.50 percentage points today.Credit:Joe Armao

Home owners were stress tested to pay 2.5 percentage points above their mortgage rates that were close to rock bottom when banks assessed their ability to service their home loans until late last year. The banking regulator APRA increased the minimum buffer to 3 percentage point by late last year.

But with the interest rate already up 2.5 percentage points since May,any further rate hikes will breach all previous stress tests applied to many recent borrowers.

Economists say recent home owners,especially those who borrowed their maximum amount,will be heading into uncharted territory and even towards mortgage stress.

Commonwealth Bank’s head of Australian economics Gareth Aird said many households will be struggling after today’s rate rise,which he expects to go up by 25 basis points.

Home loan borrowers were stressed tested to pay 2.5 percentage above their mortgage rates until late last year.

Home loan borrowers were stressed tested to pay 2.5 percentage above their mortgage rates until late last year.Credit:Ben Rushton

“The very recent borrowers are the ones who have not been able to build up buffers. They’re the most vulnerable cohort,and they’re also the one who bought property at its highest prices,” Aird said.

“For a borrower who took the maximum on offer when rates were at their lowest level they basically haven’t been tested to repay at a capacity above 250 basis points. There will be borrowers who are really struggling.”

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He warned that due to the typical three-month lag on mortgage rates increasing,the effects will not be felt until February next year.

“We are heading into unchartered territory. The simplest way to think about it,there’s going to be more and more households who will find themselves in mortgage stress.”

He said mortgage stress from rising rates will be compounded by high inflation on essential goods and services as well as the negative wealth effective felt from falling property prices.

Senior economist Matthew Hassan at Westpac,who also forecasts a 50 basis point increase and a rate peak of 3.85 per cent,said those who were stressed tested by an extra 3 percentage points from November 2021 will be better placed than those tested by an extra 2.5 per centage points but not for long.

“We’re definitely in uncharted territory in terms of the speed. It’s a record pace of tightening,we’re now passing some of these stress test thresholds. So,we’ll be testing their actual ability and actual comfort zone,” Hassan said.

He said while households were already cutting down on spending,there would more distressed property sales if there were additional shocks such as job losses.

Hassan said home owners would struggle to refinance if the property had lost value since purchase or if their income had been impacted.

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ANZ senior economist Felicity Emmett,who is expecting a 25 basis point increase,said most home buyers should be safe even after tomorrow’s announcement because of the savings war chest built up in offset accounts during the first two years of the pandemic.

“But it is likely that first home buyers that have gone in in the last couple of years,and that we know that they tend to have higher loan-to-value ratios and lower buffers,that they might be the ones that struggle with these higher rates,” Emmett said.

“Up until recently ANZ spending data had remained very resilient,but we are starting to see a loss in momentum in recent weeks. That’s something we’re going to watch really closely,that these higher rates are weighing heavily on discretionary spending. The whole idea of tightening of monetary policy is it slows down demand.”

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