The Reserve Bank of Australia hiked the cash rate to 4.35% yesterday, marking the thirteenth increase to interest rates in this cycle of tightening. With more and more mortgage holders suffering under the weight of rising rates and high inflation, can they afford another rate hike?
Mortgage repayments more than 50% higher
RateCity research shows that for the average owner-occupier on a $750,000, 25-year variable rate home loan, this latest rate hike will mean your mortgage repayments are $1,815 more expensive than in April 2022. This represents a 52% increase to mortgage repayments in only 18 months.
Increase from April by
Source: RBA average owner-occupier variable rate for existing customers, April 2022. RateCity.com.au. Note: Based on a 25-year, $750k home loan, comparing repayments with RBA average rate in April of 2.86% versus a 7.11% interest rate. Assumes the lender passes on every cash rate hike to customers, resulting in a 425 basis point increase to the original 2.86% rate from the current cash rate being 4.35%. Does not factor in fees.
When you consider that inflation levels, while down from their 2022 peak, are still rising much faster than desired, it begs the question of how can everyday Australians find a spare $1,800+ in their already stretched-thin budgets?
Higher rates means greater mortgage stress
One way of looking at the affordability of mortgage repayments is to calculate whether or not your household is in mortgage stress.
Mortgage stress is generally defined as when your home loan repayments are at or above 30% of your pre-tax income. The issue with being in mortgage stress is that you may be more likely to miss a repayment or default on the loan, particularly if interest rates continue to rise or if cost of living pressures do not ease.
The latest Australian Bureau of Statistics (ABS) data for full-time, adult, average weekly ordinary time earnings currently sits at $1,838.10, or around $95,581 per year. For the average earner, a $5,317 mortgage repayment represents 67% of their income, putting them in severe mortgage stress.
Let’s assume this person lives with another average-income-earning individual, for a joint household income of $191,162. Their mortgage repayments would be 33% of their household income, still putting them in mortgage stress.
It’s worth noting that this data is based on the average full-time income and not the median, which is generally much lower. Meaning, the impact of a 52% increase to mortgage repayments could equate to even higher mortgage stress figures.
Can households afford this latest rate hike?
It’s no secret that everything feels more expensive at the moment. The Australian Bureau of Statistics quarterly CPI indicator rose 5.4% in the year to September 2023. Further, recent ABS data shows that household spending has increased 4.9% through the year, up 9.2% for non-discretionary spending and 0.3% for discretionary spending.
The unfortunate truth is that wage growth is still struggling to keep pace with inflation. The most recent ABS Wage Price Index showed an increase of 3.6% over the year to June 2023. But with annual inflation still sitting in the 5% range, your income is at risk of falling behind.
Another increase to mortgage rates could hit household budgets hard, even if you are not currently in mortgage stress. If the cost of living continues to eat into more of your household budget, finding room to pay for another jump in mortgage repayments could be challenging.
Higher mortgage repayments will make life even harder for a lot of people. But this is not just about keeping up with your mortgage repayment; it's also about being able to pay for other non-discretionary items, like food.
1 in 3 households experiencing food insecurity
The latest Foodbank Hunger Report shows that 3.7 million households have experienced food insecurity over the last 12 months, accounting for a shocking 36%, or one in three, households.
Food insecurity is affecting different groups within society, with 77% of those that experienced food insecurity doing so for the first time last year. Also, 34% of mortgage holders reported experiencing food insecurity.
So, what is driving growing food insecurity amongst households in Australia? Rising cost-of-living is the largest culprit, with a whopping 79% of food insecure households reporting it as the cause of their hardship. This is followed by reduced or low income/government benefits (42%) and a change in household/living arrangements (26%).
Negative cash flow and distressed sellers
The impact of the latest cash rate hike can also depend on where mortgage holders live. Sydney consistently has the highest median dwelling values in the country, and arguably the largest mortgages to compensate.
New Digital Finance Analytics (DFA) data shows that in the Sydney suburb of Blacktown, 52,000 households, or about 87% of borrowers in the area, will be in a negative cash flow position following yesterday’s hike. In the Campbelltown region, 30,000 households, or 95% of borrowers, will also be spending more than they earn.
Shiv Nair, director of Ray White TNG-Glenwood in Sydney’s northwest, said that some homeowners should consider cashing out early.
“We may soon see very different property market conditions… Right now, 10% to 20% of our sales are from distressed sellers,” he said.
Steps to get ahead of rising interest rates
Make the most of your offset account
If your home loan offers one or more offset accounts, you may utilise these to decrease your interest repayments. The money you deposit into an offset account reduces the interest you need to pay on your home loan. Meanwhile, it allows you to build up savings for the future.
If your home loan allows you to make additional payments without any penalties, consider putting any windfalls, such as a tax return, into your mortgage. Extra repayments may help to chip away at the principal amount owing, and can significantly lessen your mortgage repayments.
Ask for a lower rate
Lenders often offer their most attractive interest rates to new customers. If you've been paying off your mortgage for a while, it might be worth checking online to see what rates your lender provides to new customers. Pick up the phone and ask if they can match this rate for you.
If your current lender isn't willing to lower your home loan's interest rate and you think you could get a better deal elsewhere, consider exploring your options. Use tools like comparison tables to assess different options that might be a better fit for your financial situation and needs.
Banks do not want you to default on your mortgage. If you're facing financial difficulties and are unable to meet your monthly repayments, don't hesitate to contact your lender. They typically have measures in place to provide hardship assistance, or work with you to create a temporary payment plan.