Jasper and Nadia are facing massive increases in their mortgage repayments later this year, but they consider themselves among the lucky ones.
The couple bought a two-bedroom villa in Sydney's south-west for $660,000 at the end of 2020.
They took out what might by Sydney standards be considered a modest loan, borrowing $528,000 at low fixed rates which begin expiring in November.
Their repayments will jump by at least 50 per cent over the next few years when their fixed rates start expiring and they revert to a higher variable rate.
Like 880,000 other Australians coming off fixed rates this year, Jasper and Nadia are bracing for the impact of the 10 increases to rates the Reserve Bank has made since May last year.
This pain, already being felt by borrowers with variable-rate mortgages, will be exacerbated if the central bank hikes rates for an 11th time at its meeting on Tuesday.
If interest rates are increased by 0.25 of a percentage point this week, it will mean a borrower who fixed their $500,000 loan in mid-2021will see their monthly repayments jump from $2,105 to $3,469 if they go variable in July, according to Rate City — a 65 per cent increase.
While Nadia and Jasper face a similar burden, they say their situation would have been far worse if they had listened to the Commonwealth Bank, which they say was encouraging them to borrow more than $800,000.
Jasper says the bank gave them a "sales pitch".
"What we got was a narrative that was painted as you should take as much money as you really can and find the best, highest-price property that you could," he says.
They say a bank staff member told them that "they'd bought an apartment [at] as high a price as they could, and then they'd used the equity in that to get their second home and then develop their property portfolio from there."
Jasper, who is an analyst for the NSW public service, crunched the numbers and the couple decided they did not want to take on that level of risk for their first home.
Considering how rates have climbed since, the pair are relieved they followed their gut.
"I would have been incredibly stressed," Jasper says.
"We'd be going backwards, for sure."
They've since refinanced with another bank.
'I was just in shock'
Melbourne couple Katy and Annette are also preparing for their fixed-rate loan to revert to a much higher variable rate later this year.
The pair bought their home in 2016 with ANZ and refinanced their loan with the Commonwealth Bank in 2020.
In October, the rate on the fixed portion of their almost $300,000 loan will more than double from 2.19 per cent when it reverts to the variable rate.
In dollar terms, they're expecting an increase of anywhere between $600 and $900 a month.
Katy says the thought of what they may have to sacrifice to meet the higher repayments "terrifies" her.
She says they may have to pare back spending on crucial areas such as health care and insurance.
"It's the first time ever [that] I thought maybe if things go really bad, I could actually have to sell the house," she says.
"And that sort of put a shiver down my spine because I've never considered that could happen."
The couple rely on Katy's salary to service the mortgage because Annette cannot work due to chronic pain and other health issues.
However, Katy says, they would have been in deeper trouble if they had borrowed the maximum amount offered by ANZ in 2016.
The couple took out their loan with ANZ because Katy was working for the bank at the time.
"When we first went in and sat in the office … they just spat out this pre-approval certificate with $900,000 … I was just in shock," Katy says.
"I knew [900,000] was off the planet."
When Annette was added to the mortgage, ANZ reduced the couple's pre-approval to a maximum of $495,000 because it factored in that she did not have an income.
Katy originally thought that would be tenable, but stress-tested herself on an interest rate of 8 per cent and realised it was still too much for her to afford on her own if anything was to go wrong.
Since buying the house, the couple has had to deal with increased medical costs.
Katy says the combination of this and higher interest rates would have crushed them if they had borrowed to their limit.
"We would be selling the house … and we'd be selling it fast," Katy says.
"I don't think we'd still own the house right now, to be honest. I think we would have hit [that] point earlier."
Borrowers say lenders should better explain risks
Katy says that at no point did the bank discuss whether she would be able to afford the top amount offered if rates went up or if they experienced a reduction in income or an increase in expenses.
She says many other people might not know how to stress-test themselves in different scenarios like she did.
"[Banks] really need to sit down and explain to you what the repayments would mean … and make sure that you understand that you're taking a gamble, and if they go up higher, you'll lose your house unless you want to start cutting expenses to the point where you can afford it," Katy says.
Both couples say they received basic loan documentation which mentioned the potential of interest rate rises, but there was no documentation where the primary purpose was to analyse the impact of those on their financial situation.
Jasper and Nadia say banks should also discuss the potential downsides when encouraging people to borrow to their maximum capacity.
"I think there's an ethical and moral position that they should be taking where they're explaining the full scope of the risk that you might be exposed to over the life of the loan," Jasper says.
To the argument that no-one could have predicted the last 10 interest rate rises by the RBA, Katy calls "bullshit".
"Historically, rates have never been [that] low. They might not have been able to see the speed at which it went up, but it doesn't take a genius to know that interest rates can go up and down," Katy says.
In a statement, a Commonwealth Bank spokesperson says its "loan serviceability assessments are designed to ensure that our customers can meet their obligations, and include buffers to provide customers with additional capacity to help manage any increases in interest rates".
It also says its staff are provided with training "above and beyond regulatory requirements" and documentation provided to customers "provides that interest rates can change during the life of the loan".
A spokesperson for ANZ says its lending staff complete a "Home Loan interview guide" for each home loan, which includes assessing a borrower's financial situation and potential future changes in circumstances and that "risks, including potential interest rate changes, are explained to the customer".
Financial counselling services under pressure
Katy and Annette have sought support from a financial counsellor, Claude Von Arx, from the National Debt Helpline and the Consumer Action Law Centre.
Calls to the helpline nationally have exploded, with 8,000 more calls this year compared to this time last year. In March, the number of calls was up to 37 per cent higher than at the same time last year.
"[Banks and mortgage brokers] will always tell you how much you can lend to the absolute maximum. That doesn't mean people should be taking that much out," Mr Van Arx says.
He hopes banks will be more "conservative" in their lending following the rapid rate hikes of the past year.
[Image: Claude]
Another organisation, South East Community Links, services the multicultural mortgage belt of Melbourne.
Its CEO Peter McNamara says the organisation is "buckling" under the pressure from people in financial stress.
The waiting time for financial counselling has ballooned from four weeks to 16 weeks in the past year.
"The scary thing is it's going to get worse when people move from the fixed-interest rates to the variable rates — it's going to hit hard," he said.
"It's a crisis coming."
"People are going to go without heating and eating over winter."
Mr McNamara says the organisation is seeing people who are having to sell their homes for less than they owe on the mortgage.
He says banks should offer people who borrowed at low rates a moratorium on the rate increases for a period of time.
"Why should it be that the banks will make record profits and people who went in with good intentions, with trust, but also had checks on their financial viability … suffer the most?" he asks.
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