Interest rate rises: Who are the hidden victims?

New data by the Finance Brokers Association of Australia (FBAA) has revealed that individuals who have recently been through a marriage or relationship breakdown, will be the worst affected by rising interest rates.

Many Australians in this position are now finding it almost impossible to refinance or take out a new loan, with the FBAA blaming it as the result of a lack of compassion from lenders.

The data comes off the back of the Reserve Bank of Australia’s move last week to increase the cash rate for a sixth consecutive month, with a 25 basis point rise to 2.60% - the highest rate since August 2013.

Managing director of the FBAA Peter White said it was "grossly unfair" that those who have recently divorced or separated are paying the price for actions of their former partner or the circumstances they found themselves in.

"It’s always been a more difficult path for people in this situation, but in the past it has been easier for them to buy out a property that was owned jointly, or refinance to start a new life," Mr White said.

"But now banks are simply rejecting applications outright, due solely to financial problems around the relationship breakdown, and despite an applicant having an excellent credit history to that point."

Mr White said every situation is different and lenders should assess every person individually and take into consideration the circumstances of any finance problems.

The latest interest rate hike will mean borrowers will see a significant rise in their mortgages when compared to the first rate increase in May.

On a $500,000 loan, the new rate will result in an extra $74 a month or $687 since the first increase in May.

The RBA is committed to returning underlying inflation to the 2-3% range over time, however, with economists tipping the cash rate to go as high as 3.60% in early 2023 to achieve this.

Underlying inflation currently sits at 4.90% and RBA economists expect it to be higher-still by the end of 2022.

See Also: How to have a money conversation with your partner

How to navigate relationships and tighter budgets

For many, these ongoing rising interest rates and financial stresses could cause relationship issues, and the separation from a partner could be overwhelming.

"Relationship breakdowns are messy. Sometimes one partner makes decisions that affect the other, or the stress of the situation causes medical issues, or legal and relocation costs put financial pressure on a couple and repayments fall behind," Mr White said

"But surely the Australian spirit of a fair go must be extended to people who deserve a chance to reposition their lives and move on from a difficult situation."

Mr White said brokers are helping and some have successfully made the case for their clients to lenders, but the solution is for banks to change the way they are making assessments.  

"We understand there are responsible lending criteria, but this is no excuse for denying people who meet these criteria the opportunity to start again by holding a past circumstance against them forever," Mr White said.

"Banks can easily extend some compassion instead of being pig-headed and applying an overarching and inflexible policy for everyone."

How to stay on top financially in a separation

Chief Economist at PRD Real Estate Dr Asti Mardiasmo said there are steps that can be taken by those Australians who find themselves in a similar situation.

"For those who are thinking of separating or have just separated, first and foremost ensure that you have let the relevant authorities/important people know: Centrelink, ATO, banks - especially where you might have joint accounts or joint loans, superannuation, real estate agent if renting, and perhaps most importantly look at engaging a lawyer ASAP," Dr Mardiasmo said.

"That way there is something legal in the works in terms of your separation status and also financial dealings, so that you can start to be treated as a singular entity and not a joint entity, this is very important."

Dr Mardiasmo also noted that it’s important for those individuals to ensure they have evidence of their financial independence while they were in the relationship or marriage.

"If you were previously paying a mortgage off together, where you had a certain percentage - say you were paying 50% of the monthly mortgage repayments and transferring from your account, to either the mortgage or mortgage offset, compile those," Dr Mardiasmo said.

"Line up the paperwork to prove that you were able to consistently able to contribute (the same amount and on time) to your previous mortgage - also paperwork that you were able to consistently save or have a savings account that you consistently contribute to.

"What banks are usually worried about is your security and ability to consistently make repayments, hence any paperwork that shows you can or have consistently contributed to finances, saved money, or pay off credit cards, will assist."

Dr Mardiasmo believes there is low awareness surrounding the aftermath of a separation, particularly from a financial perspective.

"It's not usually something that is in people's forefront mind when they get married, go on their honeymoon, buy their first home, start having children, etc - you don't really think about separation or financial matters once separated when you are building a life together," Dr Mardiasmo said.

"However I think it's really important that these kind of information and financial literacy is more well known, so that people can be more inquisitive about it and learn to prepare themselves throughout their marriage, as a contingency plan.

"These kinds of things can't be prepared immediately, it is built up - hence financial literacy from the very beginning is key."

How to secure housing finance as a single parent

For Australians that are in the position of being recently separated and are struggling to take out a home loan, the Family Home Guarantee (FGH) could assist in the process.

The scheme was introduced by the Federal Government on 1 July 2021 as an initiative to support eligible first home buyers purchase a home sooner with as little as a 2% deposit.

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