Like hundreds of thousands of other Australians, Madeline and Jacqueline Darkovska are prisoners to their mortgage.
The 24-year-old twin sisters are among borrowers who purchased at the height of the pandemic housing boom and are finding it impossible to refinance their home loan.
And with another double interest rate hike expected on Tuesday, the sisters — who are already struggling to meet higher mortgage repayments — fear they could lose their home in the coming months.
"We've been struggling a lot," says Madeline, who had been working casual shifts as a clerk for a Perth hospital before losing her job and having to call on her mother, Val, to help her make the required mortgage repayments.
"I haven't been able to afford a lot of things, based on lack of basic living, haven't been able to purchase a lot of food for myself or even help pay for my car bill, mortgage, everything," she tells ABC News.
As banks impose tougher lending standards and interest rate hikes drive property prices down, more Australians will find themselves in a mortgage trap, unable to refinance because no lender wants to take on the risk.
Late last year, the nation's banking regulator, the Australian Prudential Regulation Authority (APRA), introduced more stringent "stress tests", requiring loan applicants to show they can afford monthly repayments at 3 per cent more than the current rate.
However, Madeline and Jacqueline got into the property market when the stress test was just 2.5 per cent above the then rate.
In December 2020, the sisters took out a $360,000 loan to build their dream home, enticed by first home owner grants and the $25,000 HomeBuilder Grant (they later missed out on the $25,000 because they learnt that siblings did not qualify).
At the time of taking out their loan, their only option without a 10 per cent deposit, was to go with a small lender on a high variable interest rate of 4.54 per cent.
With four back-to-back rate rises, their repayments have shot up by more than $500 a month, and with more rate hikes expected to follow by year's end, they could end up with a variable rate of about 8 per cent.
That's a dire prospect the sisters have been contemplating as they fight to hold on to their home in Aveley on the outskirts of Perth.
If the RBA pushes ahead with another 50-basis-point rate hike on Tuesday, the cash rate will hit the highest level since December 2014.
It will tip many people like the Darkovska twins into further mortgage stress, and at risk of defaulting.
"We'll probably have to sell the house if we can't keep up with the repayments — it's really scary for us," Madeline says.
More Australians in 'negative equity' as house prices fall
Tougher lending standards are not the only problem for Australians who borrowed heavily at the height of the pandemic housing boom.
Many people who took out big loans, with low deposits, also face the prospect of falling property prices, which is another factor that can make them a "mortgage prisoner".
If house values decline by 20 per cent over the next 18 months, as some analysts are predicting, that would tip more Australians into negative equity — when the value of property falls below the outstanding balance on the mortgage used to purchase it.
"Mortgage prison is where you can't refinance, and the main reason that would be is if the equity in your property falls below 20 per cent," RateCity's research director Sally Tindall says.
"Banks, typically, will charge refinancers lenders' mortgage insurance, which can run into the tens of thousands of dollars, if they're refinancing, but don't have that magic 20 per cent deposit."
According to the latest data from banking regulator APRA, in the six months to March this year, the value of new loans written, with a deposit size of 20 per cent or less, was $112 billion. RateCity estimates this applied to more than 176,000 mortgages.
Ms Tindall says someone in Sydney who bought in December of last year with a 20 per cent deposit, is likely to be in mortgage prison already because the peak of the Sydney market was in January of this year and has been falling ever since.
Add to this, the number of people who can't pass the banks serviceability tests, and that figure may well run higher than 176,000.
Analysis from RateCity shows someone who took out a loan in September 2020, and borrowed to capacity, may already be struggling to refinance — because they won't meet the new lenders' serviceability test.
RateCity modelled this by looking at someone who had an annual income of $100,000 — no kids, no other debts and minimal expenses — and took out a $747,500 loan on a variable rate of 2.69 per cent.
Fast forward to today they'd have a loan size of $715,022, would be earning an estimated $105,062 and, if the RBA hikes by 0.50 per cent on Tuesday, they will see a rate of 4.94 per cent.
"If they wanted to refinance to a lower rate, we estimate a good rate would be 4 per cent, they'd fail the stress test," Ms Tindall says.
"In fact, our analysis shows they will need to earn an estimated $5,538 — 5 per cent — more than they currently do.
"By September next year, if the cash rate has risen to 3.35 per cent, as forecast by Westpac and ANZ, they would need to earn an estimated $123,750 to pass the bank's stress test if they wanted to refinance to a rate of about 5 per cent."
Ms Tindall says these calculations are estimates only, as the amount someone can borrow depends on their personal situation and their lender.
"What we do know is CBA says that between 8.3 per cent and 8.7 per cent of loan applicants borrowed at capacity," Ms Tindall says.
"These people are unlikely to be able to pass the banks' serviceability tests in coming months or, potentially, already."
Australians on low fixed rates could struggle to refinance
Christopher Ladley, who runs Mortgage Choice brokers in Elsternwick, Melbourne, is seeing more customers coming forward wanting to refinance.
He says the interest to switch loans is especially high from Australians who are on fixed rates and are about to roll off next year or the year after.
"People are worried about interest rates increasing so fast and so rapidly in recent months," Mr Ladley says.
"People are panicking, because they're worried about what happens when I roll off a really great fixed rate."
Mr Ladley notes that, with the banks' assessment rate for a variable loan now at about 6.5 to 7 per cent, many people could struggle to refinance but urges people to check with a broker who may be able to assist.
"A lot of people, I guess, got the indication that interest rates weren't going to increase until 2024, because the Reserve Bank told us so. So people listened to that advice and made decisions based on it."
He says that, because of those RBA statements, some of them "borrowed more than in hindsight they should have".
"Some people, if they borrowed the absolute maximum a couple of years ago, they might not actually qualify for that same loan now in in today's environment," he says.
"The banks are now very conscious and focusing on the debt-to-income ratio. And they've really aren't comfortable with people borrowing more than say six times their income."
At risk of a mortgage trap? Consider refinancing sooner than later
Ms Tindall urges people who are not yet in a mortgage trap to consider refinancing.
"If you think that the proportion that you own of your home could slide below that magic 20 per cent mark, think about taking action," Ms Tindall says.
She says there are many costs associated with refinancing, including switching fees, government administration charges and new application fees.
"But [lenders] need new customers … ask them to waive that up-front fee, they might just say 'Yes' to secure your business."
Ms Tindall also urges those who are already in a negative equity position not to panic.
"If you're on a variable rate, it is your right to haggle with your own lender for a better deal," she says.
For those who can't refinance, she says: "The key is to put your head down and keep your monthly mortgage repayments up."
"If you can't meet the rising cost of monthly mortgage repayments, the bank may start calling you, wanting to have some tough conversations, where you might end up having to sell your property," Ms Tindall says.
Pandemic housing boom left more Australians in debt traps
The other big unknown is what happens with unemployment.
If people start to lose their jobs, like Madeline has, they risk defaulting on their home loans.
Unlike many other areas across the country, Aveley's house price growth — where the twins have built their home — has held steady (up 1.2 per cent in the three months to August and up 3.7 per cent over the year according to CoreLogic).
Even so, the twins would have already defaulted on their loan if it wasn't for their mum's help, since they do not meet the higher stress test being imposed by lenders (and wouldn't have, even if their income had stayed the same, let alone gone backwards).
Jacqueline says they would have never had taken on a mortgage if it was not for policies and statements from the government and regulators.
She says they rushed into the market in the hope of getting the $25,000 HomeBuilder grant and promises from the RBA at the time that rates would not rise until 2024.
"Don't sell false hope," is her message to politicians and regulators.
"You sell the Australian dream, but you rip it out from underneath people."
