How will rising rates impact mortgage stress?

By Jon Bragg

April 26 2022
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Mortgage holders could face thousands of dollars in extra repayment costs per year as a result of impending rate hikes.

With interest rates widely expected to lift off from June this year, new analysis has revealed how much Aussies will have to pay to service their home loans and what effect this will have on current levels of mortgage stress.

Using the example of a $500,000 loan with a 25-year term and variable interest rate of 2.7 per cent, Savvy found that a 1 percentage point rate rise would see monthly repayments rise to $2,557 from $2,294 - adding up to an extra $3,156 per year.

Research from Roy Morgan late last year found that 15.8 per cent of mortgage holders, or a total of 584,000, were considered at risk of mortgage stress.

Savvy MD and home finance expert, Bill Tsouvalas, noted that mortgage stress sat at record lows towards the end of 2021 following government intervention such as extended payment holidays, JobKeeper, JobSeeker and COVID-19 disaster payments.

“With record levels of government debt on the books now, the government – and whatever that government might be after the 21 May election – will be reluctant to bail out homeowners in view of creating even more inflation,” he said.

“What is pleasing to note is that unemployment is at near-record lows (4 per cent), which should push wages higher, especially in services where employers are scrambling to fill positions.”

Using a combined average income of two people of $135,720, and the latest wage price index from the Australian Bureau of Statistics (2.3 per cent), Savvy calculated that households can expect to receive $3,121 extra per year.

This would mean that they would only need to find an additional $35 each year to meet the increased mortgage repayments outlined in the firm’s earlier explored scenario.

However, Savvy pointed out that unforeseen events such as a significant drop in work hours or a job loss would immediately put the household in mortgage stress.

Mortgage stress is typically defined as paying more than 30 per cent of a household’s pre-tax income towards mortgage repayments.

Savvy said that some 20.3 per cent of household income goes towards repayments in its current scenario, rising to 22.6 per cent after a 1 percentage point rate rise.

The Home Loan Affordability Index from Bluestone Home Loans, which measures the proportion of average income required to make an average home loan repayment, found that 2021 was the worst year for home loan affordability on record with a decline of 14.5 per cent.

Meanwhile, ANZ has predicted that the strong outlook for employment and wage growth moving forward will cushion the anticipated lift in rates.

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