Time to fix rates or risk mortgage stress, report warns

Despite credit crunches, royal commissions into the banking and finance sector, and a global pandemic, online credit score provider Credit Savvy’s latest report has found Australians have been “undeterred” from buying houses.

The value of all residential mortgage debt in Australia as of 2021 reached $2,021.3 billion – comprised of $1,333.5 billion held by owner-occupiers and $687.8 billion held by investors, Savvy revealed.

Whether it’s to own and occupy or as an investment, the report said outstanding mortgage debt has increased year-on-year since 2011, where the volume of debt (combined) was at $1,211.5 billion with the only outlier being 2018-2019, where levels remained much the same.

Savvy chief executive Bill Tsouvalas said numerous government interventions such as extended payment holidays, JobKeeper/JobSeeker and COVID Disaster Payments had potentially kept mortgage stress down and Australians’ borrowing.

But he warns with the RBA set to raise interest rates, borrowers should be seeking finance solutions.

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

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

As inflation increases and hits the target between 2-3 per cent, the Reserve Bank of Australia will have to increase interest rates.

If inflation outpaces interest on deposit, the purchasing power of the Australian dollar weakens – resulting in people needing more money to service a home loan.

Interest rate rise impact on borrowers

The Savvy report said if a borrower takes out $500,000 over a 25-year loan term with a variable interest rate of 2.7 per cent (the average as of December 2021), their monthly repayments would be about $2,294 – assuming their combined average income is $135,720 (the average wage in Australia multiplied by two).

If wages (as a whole) rose in proportion with inflation, this may not be “a big a problem”, as it seems, the report stated.

However, according to the ABS, the Wage Price Index only rose by 2.3 per cent over December 2020 to December 2021.

If a household is on the average income (described above) and gains a mere 2.3 per cent pay rise, that means $3,121.56 extra income per year.

If that household experiences a 1 per cent p.a. increase in interest rates, they will need to come up with $35 per year to accommodate the mortgage, which “could be absorbed with little effort”.

However, if that family does not get a pay rise at all, they would need to come up with $3,156 extra on the mortgage per year.

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 – a situation where a household spends more than 30 per cent of their earnings on servicing a mortgage.

While the above scenario could put many under mortgage stress, Mr Tsouvalas said it was “pleasing to note” that unemployment is at near-record lows (4 per cent).

“[This] should push wages higher, especially in services where employers are scrambling to fill positions,” Mr Tsouvalas said.

[Related: Borrowers on the brink of financial stress]