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3 in 4 borrowers will need to cut back expenses when RBA hikes rates

3 in 4 borrowers will need to cut back expenses when RBA hikes rates

New research shows three in four borrowers will have to cut back their spending to meet the forecasted RBA hikes.

A RateCity.com.au survey of 1,000+ Australians with a mortgage found:

  • 31% would have to make significant cutbacks to afford repayments if they rose by $300 per month.
  • 32% would have to make minor cutbacks.
  • 1 in 7 borrowers (14%) say they would not be able to afford the higher repayments, even with cutbacks.
  • 1 in 4 borrowers (23%) said they would still be able to afford higher repayments without changing their spending habits.

RateCity.com.au analysis shows the average borrower with a $500,000 owner-occupier loan and 25 years remaining could see their repayments rise by $303 per month by next February, if CBA forecasts are realised.

Impact of higher rates on $500K loan by February 2023

RateMthly repayments 

($500K loan)

Today

2.92%

$2,350

March 2023

4.07%

$2,653

Difference

1.15%

+$303

Source: RateCity.com.au. Calculations are based on a $500,000 loan with 25 years remaining at the RBA’s existing customer rate of 2.92% for owner-occupiers paying principal and interest. Rate rises are based on CBA forecasts for the cash rate to rise to 1.25% by Feb 2023.

RateCity.com.au research director, Sally Tindall, said: “While most Australians will be able to take these rate hikes on the chin, not everyone will be taking them in their stride.”

“Many variable borrowers will have to put their expenses under the microscope to see where they can trim the fat,” she said.

The latest APRA figures show 24.4 per cent of mortgages settled in the December quarter had a debt-to-income ratio of six times or more, which is considered risky by the regulator – the price many Australians had to pay to get into an overheated housing market.

“People who overstretched themselves to get into the property market recently could feel the heat of the upcoming rate hikes. While the banks have checked these borrowers can meet their mortgage repayments if rates rise by 3 per cent, some families will have to make tough budget cuts to make certain that happens,” she said.

“Borrowers who’ve had a change in circumstance could also struggle to make higher mortgage payments. A new baby, a change in careers, a bout of ill health, even a move to a different region can be enough to stress the family budget.

“While the markets are currently predicting the cash rate will be over 3 per cent in eighteen months’ time, it’s near impossible to see the RBA going that high in this time frame.

“A lot of people who bought recently are already mortgaged to the hilt and the RBA is acutely aware of this. The central bank is not going to hike the cash rate so far and so fast that people start defaulting on their mortgages en masse,” she said.

At the National Press Club in February, RBA Governor Lowe said: “the household sector has a lot of debt so I think they'd be quite responsive to an increase in interest rates.”

of new dwellings and existing dwellings

1 in 4 borrowers will not have to make cutbacks

Not all borrowers will struggle to meet RBA hikes. RateCity.com.au’s research found almost one in four home loan customers would still be able to afford repayments without changing their spending habits, if they rose by $300 per month.

Statistics from APRA also show that money saved in offset accounts is at a record high of $232 billion, while the average owner-occupier is 45 months ahead on their repayments.

“COVID has had a polarising effect on family budgets over the last two years. While some households are struggling to make ends meet, others have more money saved in their home loan than ever before,” she said.

“According to APRA, the average borrower is 45 months ahead on their mortgage repayments – that’s almost four years ahead on their debt. These people have big buffers to fall back on if they can’t find enough money in their monthly budget to pay the bills, and that’s a good thing,” she said.

Tale of two cities – home loan borrowers taking on risky levels of debt vs those with extra money in the mortgage

Proportion of new residential mortgages with a debt-to-income ratio of six times or higher

Dec quarter 2021Last quarter (Sept 2021)1 year ago (Dec 2020)
Debt-to-income of 6 times or higher24.4%23.8%17.3%

Source: APRA quarterly authorised deposit-taking institution statistics for December 2021, all ADI’s, released 15 March 2022.

Offset account balances – outstanding loans (owner-occupier and investor)

Dec quarter 2021Change from previous quarterChange from
1 year ago

$231.68 billion

$9.74 billion
+4.4%

$29.60 billion
+14.6%

Source: APRA quarterly authorised deposit-taking institution statistics for December 2021, all ADI’s, released 15 March 2022.

RateCity survey

If interest rates rise and your mortgage repayments were to increase by $300 per month, which of the following would happen to you?

I would not be able to afford the repayments

14%

I would need to make significant cutbacks to afford the repayments

31%

I would need to make minor cutbacks to afford the repayments

32%

I would still be able to afford the repayments without changing my spending habits

23%

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This article was reviewed by Research Director Sally Tindall before it was published as part of RateCity's Fact Check process.

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