Dodgy lenders lurk as affluent come under mortgage stress

The number of Australian householders suffering mortgage stress is set to jump dramatically this year, with rising interest rates causing financial strain even for wealthy households, according to a new report.

And a small number of unethical finance brokers are exploiting the more difficult conditions by luring home owners into accepting exorbitant refinancing packages, according to another report.

More than 700,000 households will endure some form of mortgage stress – usually defined as mortgage repayments worth more than 30% of household income – by June 2008, according to the latest JP Morgan Fujitsu Consulting Australian Mortgage Industry Report.

That is almost four times as many as this time last year, while the 300,000 under severe stress is also much higher than before.

About 46,000 households are at the professional end of the market, suggesting rate rises have taken some high income earners with big mortgages by surprise.

And a small number of mortgage brokers are using the tough times to push home owners into inappropriate refinancing, in the process earning themselves exorbitant fees, according to a new Australian Securities and Investments Commission report.

ASIC investigations have revealed several cases of “equity stripping,” which involves homeowners accepting refinancing options that mean they lose as much as 20% of the equity in their homes.

In several cases, not only could the homeowner not afford repayments under the refinancing package, they had to pay up to $24,000 in fees to brokers to secure the finance.

ASIC’s acting executive director, consumer protection, Delia Rickard, says the report highlights the risks for borrowers under mortgage stress refinancing with fringe lenders at great expense, but without resolving their underlying financial problems.

“These borrowers were intent on saving their family home, which placed them in a vulnerable position where they were prepared to accept almost any solution,” Rickard says.

And the mortgage squeeze also looks set to have a big impact on the vast majority of ethical mortgage brokers, with reports that some banks are looking at cutting fees to brokers.