The Changing Landscape of Homeownership in Australia
Interest rate hikes are no longer just a concern for young families. In the past, these increases primarily affected those with mortgages in the suburbs, where young families typically lived. However, the current situation is different. The Reserve Bank of Australia (RBA) has shifted its focus, and now older Australians are feeling the impact more than ever before.
This change has been gradual but undeniable. People are buying homes later in life, and mortgages are lasting longer than they used to. As a result, many Australians find themselves in their 50s still paying off their mortgages. The latest RBA rate increase has raised the official rate to 4.35 per cent from 4.10 per cent, which has pushed home mortgage rates closer to 7 per cent.
Nerida Conisbee, the chief economist at Ray White, highlighted that this shift is not only affecting younger families but also older Australians. She noted that the idea of retiring with a paid-off mortgage is becoming increasingly foreign for many households. “In previous generations, it was quite normal to have paid off your mortgage by your 50s,” she said.
The level of debt held by Australians has also made the impact of interest rates on household budgets more significant. “The Reserve Bank doesn’t need to move much on interest rates because compared to the early ’80s, people have much higher levels of debt,” Ms Conisbee explained. “So even a small nudge upwards has an oversized impact on people with mortgages.”
As more older Australians carry the burden of interest rates, banks have been adjusting their strategies. Instead of making loans cheaper, they have been extending loan terms. “Banks are really extending loan terms,” Ms Conisbee said. “If you look at CBA, it used to be standard to get a 25-year loan. Now it’s 30, and every time they extend it, it increases people’s borrowing capacity but also the time period in which they’re paying off a mortgage.”
Financial advisers are concerned about the cumulative effect of rising rates on older Australians who are still stuck with a mortgage. James Hayes, a financial adviser at Southern Advisory, pointed out that for clients close to retirement, the situation changes significantly. “When you’re 10 years out or less from stopping work, every dollar going out in mortgage interest is a dollar that isn’t compounding inside super,” he said.
Census data shows that over the past two decades, the number of Australians aged 55 to 64 who own their homes outright has almost halved. For many older Australians, the key pathway to clearing their mortgage is to pay from superannuation savings just as they were about to retire.
According to a Colonial First State report, about 14 per cent of Australians are retiring with a home loan still being serviced, while 28 per cent of pre-retirees between the ages of 50 and 64 still have a mortgage. Eventually, this generation will fade, but they may not be fully replaced. Future generations may not aspire to be mortgaged homeowners.
A key report from the Australian Housing and Urban Research Institute forecasts that the overall level of homeownership will drop from a long-term average near 70 per cent to 63 per cent by 2040.
While some older Australians may see the upside of higher rates when banks adjust cash deposit rates higher in the weeks ahead, Shane Oliver, the chief economist at AMP, points to the wider problem: the level of household debt in Australia is still almost double the size of household bank deposits by value.
For now, the middle-aged, highly indebted mortgaged holders are paying the price of buying a home in a market where prices remain elevated on every measure.
