How to know if you are at risk when interest rates rise

3 minutes

A shocking number of Australians are already estimated to be experiencing mortgage stress – meaning they are struggling to make repayments – even before interest rates could be hiked as high as 2 per cent by the end of the year.

Interest rates sit at a record low of 0.1 per cent, but the Reserve Bank of Australia has given its biggest hint that a rise is imminent with experts pegging June for the first increase.

But according to Roy Morgan, an estimated 584,000 mortgage holders were already at risk of mortgage stress at the end of 2021, said Savvy managing director and home finance expert Bill Tsouvalas.

“This is after numerous government interventions such as extended payment holidays, JobKeeper/JobSeeker, Covid disaster payments, and so on,” Mr Tsouvalas added.

People are considered to be in mortgage stress if more than 30 per cent of their income is spent on their loan.

Whether more people fall into mortgage stress could hinge on if wage rises can keep up with inflation, which hasn’t been the case so far in Australia.

While Australians’ pay increased by 2.3 per cent annually overall last year, it was well below inflation which is sitting at 3.5 per cent, meaning the cost of goods is eating up any extra pay.

If a household of two with a combined average income of $135,720 were to get a 2.3 per cent pay rise that would amount to an extra $3121 per year.

A 1 per cent rate rise on a $500,000 loan with a 2.7 per cent fixed variable rate would see repayments leap by an extra $3156 a year for the household.

This means they would need to come up with $35 per year to accommodate the mortgage, which would “hardly register as a blip in the family budget and could be absorbed with little effort”, Mr Tsouvalas said.

“However, if that family does not get a pay rise at all, they would need to come up with … $3156 extra on the mortgage per year. That is more easily said than done for many Australians,” he said.

“If the same family loses a significant amount of work hours, or is suddenly on a single income due to a shock job loss, this would immediately place them in mortgage stress.”

With record levels of government debt, even if wages fail to keep up with the cost of living, whoever is elected in May would still be “reluctant to bail out homeowners in view of creating even more inflation”, Mr Tsouvalas added.

“If you are a homeowner and haven’t fixed your rates, the time to act is now,” he said.

“Refinancing at a lower rate is also better to start sooner rather than later because, with all indicators pointing to rising inflation, rates will definitely start shifting upwards.”

The last time interest rates rose was a staggering 11 years ago in November 2010, which means more than one million homeowners could be facing their first hike in rates.

Andrew Walker, chief executive and founder of digital lender Nano, said that $400 billion worth in fixed rate mortgages with the major banks would be rolling off into a variable interest rate in the next couple of years.

He said he expected many Aussies will be looking to refinance.

“We’re sitting on the edge of the cliff of the fixed rate roll over. The Commonwealth Bank of Australia alone is expected to have a whopping $53 billion of fixed rate mortgages rolling over into variable rates in the second half of 2023,” Mr Walker said.

“Assuming the other major banks mirror the same structure as the CBA, we could expect to see $400 billion in fixed rate mortgages rolling off into a variable interest rate in the next couple of years.

“If market expectations of rising rates are correct, these will be significantly higher, leading to a sharp lift in repayments.”

Originally published by Sarah Sharples on 22 April 2022, full article here