Tara Higginson pulls no punches when asked what will happen if interest rates rise on Tuesday, off the back of soaring inflation.
"I'm up shit creek", says the single mother of four who, in the midst of the pandemic, took out an interest-only variable loan of $510,000 – more than six times her income.
"I don't have a second income to be able to buffer that fluctuation when it [interest rates] increase," she says.
"There would have to be cutbacks."
And rate rises are likely to happen at the same time as house prices, nationally, fall, according to CoreLogic's research director, Tim Lawless.
CoreLogic data to the end of April shows that housing values are still rising at the national level, but a 0.6 per cent monthly rate of growth is the lowest reading since October 2020.
Sydney housing values recorded the third consecutive month-on-month decline, down 0.2 per cent.
Melbourne values were flat (-0.04 per cent), but the city recorded house price falls for three of the past five months.
Hobart was also down, by 0.3 per cent, but most other state capitals recorded gains above 1 per cent.
"Stretched housing affordability, higher fixed-term mortgage rates, a rise in listing numbers across some cities and lower consumer sentiment have been weighing on housing conditions over the past year," Mr Lawless says.
'Really scared to think about' rate rises
To build her dream home in Logan Reserve, in the outer suburbs of Brisbane, Ms Higginson took out a big home loan and the rest was funded by the $25,000 HomeBuilder grant and first home buyer grants of about $15,000. She also pulled $20,000 out of her superannuation.
She currently pays a variable interest rate of 2.98 per cent, interest-only, and says if rates rise even slightly, she will have to cut back on her youngest daughter's education and take out a second job.
"And I hope it never comes to it. But if it [rates] start to increase, which we know it will, I need to find a second source of income. It's something I'm really scared to actually think about."
She says if she can't bring in extra income, she could be forced to sell.
"That would like, kill me, to say goodbye to it.
"I know, a lot of our neighbours are currently looking at refinancing and using the equity because the price of their house and the valuations have gone up so much that they can now look at fixing interest rates and things like that, just to give them a bit more security.
"And I honestly don't think I could do that. I don't think I could approach a lender and say, 'Hey, can I try and fix my loan for five years at the current low rates? Because of the changes [tighter lending standards] that have happened, I wouldn't get approved again."
Ms Higginson isn't alone in facing the prospect of financial stress.
APRA data shows that of 1 million new home loans written over the past two years, about 280,000 Australians have borrowed six or more times their income and/or have loan-to-value ratios of more than 90 per cent.
These are the borrowers that are considered most vulnerable if there are consecutive rate rises.
It's the very group that the Reserve Bank of Australia, in its most recent financial stability review, has noted is most at risk of tipping into mortgage stress.
And with so many borrowers struggling to pay their mortgages, the fear is that defaults on loans could rise and that could spell wider trouble for the economy.
There are now questions as to whether financial regulators, in particular banking watchdog the Australian Prudential Regulation Authority (APRA), should have acted sooner to restrict lenders from being able to loan vulnerable people six or more times their income, especially if they had very low deposits.
Should APRA have eased lending rules pre-pandemic?
As the main regulator of banks and superannuation funds, APRA's mandate is to ensure financial system stability.
To that end, APRA can restrict lending by banks to ensure that not too many borrowers take out massive loans that may not be able to repay.
And when the market slows, it can do the reverse – ease rules on lenders.
During a house price boom at the time, APRA brought in new rules in December 2014 as part of its efforts to "reinforce sound residential lending standards".
They required the banks to assess all home loans against a floor of at least 7 per cent, or 2 per cent above the rate paid by the borrower, whichever was higher.
But in May 2019, APRA chairman Wayne Byres said they had written to lenders proposing that the 7 per cent serviceability floor on home loans be removed.
While removing the floor, APRA recommended that the actual interest rate buffer paid by the borrower, be increased from 2 per cent to 2.5 per cent.
The removal of the floor came at a time of falling house prices, record-low credit growth and expectations that the Reserve Bank of Australia (RBA) would further cut interest rates.
This seemed fine at the time but fast-track to mid-2021, when house prices had shot up again due to record-low interest rates, first home buyer grants and the HomeBuilder scheme.
At that time, more than one in five Australians taking out a mortgage were borrowing at least six times their income.
Many of these borrowers were being tested for their ability to cope with future interest rates as low as 4.5 to 5.5 per cent.
Regulators including APRA and the Reserve Bank realised this was a problem.
On October 6, APRA issued a statement from APRA chairman Wayne Byres saying the regulator would lift the buffer from 2.5 per cent to 3 per cent, in the expectation that "housing credit growth will run ahead of household income growth in the period ahead".
"With the economy expected to bounce back as lockdowns begin to be lifted around the country, the balance of risks is such that stronger serviceability standards are warranted," Mr Byres said.
The question is, did the regulator move too slowly? Had the horse already bolted?
Lead economist at Impact Economics, Angela Jackson, says it may have.
She expects the Reserve Bank will lift interest rates between 2 to 3 per cent over the coming years, and home values will fall further.
Some reports, including one by AMP Capital's Shane Oliver, suggest Australian house prices are likely to fall by 10 per cent to 15 per cent into 2024 primarily because of poor affordability and rising interest rates.
With this situation unfolding, Dr Jackson questions whether APRA's pre-pandemic move to remove the 7 per cent serviceability floor on home loans was the right one.
"Now, at the time, obviously, the economy was quite weak, and lending was pretty slow, so it seemed like a good policy to get the economy moving," she says.
"And whether there was a need and a justification for APRA to move a bit earlier to ensure that borrowers effectively don't get caught out when interest rates do ultimately rise."
Dr Jackson says, when interest rates did go to those ultra-low levels, the regulators should have known that rates would rise back to more normal levels in future, and to "really think through what a cap would mean".
"A 2.5 per cent rate above 0.1 per cent is very different to what we'd say is a normal interest rate of around 2 or 3 per cent," she says.
"I think there probably needs to be a bit of thinking through [by regulators] in terms of what this was going to mean. And perhaps that thinking was a bit slow.
The Reserve Bank itself has said that if interest rates do go up by 2 per cent, mortgage stress will increase from around 10 per cent to 20 per cent.
"Now, that's a lot," Dr Jackson says.
While that can lead to more people having to sell their homes, she says that's unlikely to occur unless unemployment rises significantly.
"In all reality, people will do a lot to hang on to their home," she says.
APRA not there to protect borrowers, says former staffer
According to former APRA staffer Wilson Sy, borrowers are at risk because APRA's steps to restrict or ease lending are not done with the consumer in mind.
Dr Sy notes property prices have risen faster than wages, and interest rates could, over time, rise above 5 per cent.
"And possibly, if they are forced to default on [mortgage] payment and so on, it could have repercussions for the lenders, the banks themselves."
Dr Sy was the principal researcher at APRA between 2004 and 2010, and a big part of his role was assessing housing credit risk. Or in other words, whether people who cannot afford to are taking on too much housing debt.
"APRA doesn't look at individual consumers," Dr Sy notes, having called it a "fake regulator" in a 2019 paper that was submitted as part of a review into the organisation.
APRA declined to comment for this story, but its chairman Wayne Byres has previously used this term, "caveat emptor", when addressing questions about whether the regulator does enough to protect borrowers.
During the banking royal commission, APRA was characterised as a "hear no evil, see no evil" regulator.
Consumers in stress from irresponsible lending can get repayment moratoriums
Consumer Action Law Centre chief executive Gerard Brody says, while APRA does not have a consumer remit, the other main regulator in this space, the Australian Securities and Investment Commission (ASIC), does have powers to go after those that lend irresponsibly.
"It's difficult to say whether the APRA rules are sufficient — their role is really to protect against systemic risk in the finance system," he notes.
"I think what's important, though, is that borrowers still have rights, individually, when it comes to bank lending through our responsible lending rules. And it's really the role of ASIC… to ensure that banks are complying with those rules.
Mr Brody is concerned borrowers who took out mortgages worth six or more times their income will face trouble.
He also worries some may have understated their financial position off the back of advice from their bank or broker.
The latest UBS survey of so-called "liar loans" suggests the number of home buyers overstating their financial position when applying for a home loan has not materially decreased despite the introduction of the caps.
A report by UBS banking analyst John Storey — covering 860 Australians who secured a residential mortgage between July and December 2021 – found that the number of factual misstatements made had slightly declined from a record 41 per cent in 2020, to 37 per cent in 2021, but that ANZ had bucked the trend.
More than half of respondents, or 55 per cent, that had taken out a mortgage with ANZ in the six months to December 2021 indicated that they had lied in their application documentation.
And 81 per cent of the 93 respondents who misrepresented their ANZ-originated loan claim they were advised to do so by their banker.
Mr Brody says, in previous years, many of these types of borrowers struggled to repay and had to sell their homes and were calling the law centre for help.
"It's really worrying to see the banks and other finance companies, and mortgage brokers who get paid through commission sales, to be pushing on high loans onto individuals," Mr Brody says.
"It's important, though, that people know that they do have rights around responsible lending.
"And if a bank has not done the right thing, they can make a complaint and get a remedy to ensure that they are only obliged to continue paying low loan repayments that are affordable.
Dr Jackson says governments still have a part to play in ensuring they don't add fuel to an already overheated housing market.
"For too long, we've been relying on households increasing their debt levels to keep economic growth going, rather than having real wages growth," she argues.
Dr Jackson says government policies need to move away from short-term fixes like first home buyer grants.
"I wouldn't want to see more things in that space that just encourage people to take on more debt," she says.
"We need to actually lift people's incomes."
'I never thought they'd give me as much money as they did'
Ms Higginson says she was surprised she even got the home loan in the first place.
"I never thought they'd give me as much money as they did," she says.
"Like, how have I been approved for over half a million dollars on a single income with less than 20 per cent deposit?"
Ms Higginson's advice to others who want to get into the housing market is to plan for the worst-case scenario.
"I have borrowed [to] my max capacity," she says.
"And at the time, it was literally a whirlwind. I got the pre-approval, found the land three days later, found the builder a week after I signed the land contract — it just all happened so quick.
"I didn't stop to think, how's this going to affect me… whether I can [make] the repayments.
"I was just so swept up in being approved, that I was like, 'this is a dream come true. Just roll with it and keep going and think about the consequences later'. Now I'm in here, I have to look at how things are going to change and what the future holds.
"I know, owning a house is the Australian dream. It's what everyone wants. It's your own slice of paradise, that's yours. But make sure that the banks can't take it away. Make sure that you are secure and you are looked after."
