People who purchased a home with a small deposit in Sydney last year are at risk of carrying more debt than their home is worth at a time when interest rates are climbing and the cost of living is high.
Recent modelling from PropTrack suggests home values could drop as much as 18 per cent by Christmas next year across Sydney.
Those who purchased at the peak of the market with a less than 20 per cent deposit could find themselves in a negative equity position, where they owe more to the bank than the property is worth.
This includes first home buyers who purchased through the First Home Loan Deposit Scheme (FHLDS) with a 5 per cent deposit.
Negative equity affects those who need to sell their homes during a market downturn because it means they could remain in debt to their home loan provider even after the property has been sold.
It comes after a huge number of homebuyers reported they felt worried about affording mortgage repayments, with financial markets factoring in a cash rate of 3 per cent by the end of the year.
Data from comparison site Finder reveals that in April, about two thirds of homebuyers were concerned about meeting mortgage repayments ahead of interest rates rises.
In the four months following the survey, the cash rate was hiked 175 basis points, bringing the average variable interest rate soaring to 4.18 per cent.
Last month, the portion of Australian homeowners struggling to afford mortgage repayments rose to 24 per cent, up from 20 per cent the month prior.
Data from Lendi shows that the number of homebuyers purchasing with a small deposit has also grown.
Since August last year, the number of loans worth more than 90 per cent of the property’s value rose from less than 10 per cent to 14 per cent.
PropTrack executive manager of Economic Research Cameron Kusher said while anyone who purchased in Sydney last year was at risk of negative equity if prices dropped 18 per cent, those who had a deposit of less than 10 per cent were particularly vulnerable.
“Recent purchasers that really stretched themselves to get into the market and borrowed with a very small deposit – they are vulnerable in that their property is going to be worth less than what they purchased it for,” he said.
“I think that mortgage arrears are going to be fairly low but there’s definitely some people that are going to get caught out and will potentially have to sell their home.”
Lendi Group CEO David Hyman said rising property prices in Sydney last year had made it difficult for homebuyers to purchase with a traditional 20 per cent deposit.
He said while first homebuyers who purchased through the FHLDS were at risk of negative equity, those who could afford to hold the property throughout the downturn would be protected – though refinancing to a lower rate could prove challenging.
“Current RBA data suggests that about 2.5 per cent of households may be at risk of negative equity due to falling prices, which is slightly higher than pre-Covid conditions,” Mr Hyman said.
“Those who find themselves in a declining or negative equity position will find it harder to refinance to another lender.”
A Finder survey of homeowners from July shows almost one in five Australian mortgage holders refinanced their home loan in the past six months, with the same proportion planning to do so in the coming six months.
Finder home loans expert Richard Whitten said it was typically first homebuyers that purchased with a small deposit, making them the most vulnerable in expensive markets such as Sydney.
“Given how much property prices have risen in the last few years, saving up a 20 per cent deposit is just not realistic for a lot of first time buyers,” he said.
“These borrowers will get hit harder by raising rates and falling property prices.”
He said borrowers facing negative equity would need to “play the long game.”
“Focus on making repayments and waiting for property values to rise,” he said.
“While it’s very hard in a time of high inflation, finding ways to spend less and save more always helps.”
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