Mortgage business logo

Borrowers on the ‘brink of financial stress’

While a multibillion-dollar cost of living package formed the centrepiece of the federal budget, new research reveals one in three borrowers are on the brink of financial stress.

A survey of more than 900 mortgage borrowers, by financial comparison site Canstar, found one-third were close to financial stress, signalling concerns over a rise in cost of living and looming interest rate increases.

The results showed more than 90 per cent of respondents were either at their weekly household spending limit, or would feel the pinch if costs increased up to $500.

The report revealed 14 per cent of respondents were already at their limit, 19 per cent would be under “financial stress” if living costs went up $100, and 23 per cent of borrowers would feel the pinch if costs rose by $101 to $200.

Meanwhile another third of respondents (34 per cent) signalled an increase of between $201 to $500 would push them over their limits.

Federal budget eases some cost of living pressures

To ease some pressures on the growing cost of living, the federal budget announced a temporary cut to the fuel excise and one-off cash payments of at least $250 for pensioners and other welfare recipients.

md discover

It also announced an expansion to its First Home Guarantee Scheme to 35,000 (up from 10,000), plus a further 10,000 places towards a new Regional Home Guarantee and 5,000 guarantees towards its Family Home Guarantee.

Borrowers with large loans will ‘feel the pinch’

But as household incomes continue to fall behind the cost of living, households with a mortgage will face “dire financial stress” when the Reserve Bank lifts the cash rate, finance expert at Canstar, Steve Mickenbecker said.

“There is a whole generation of borrowers who have never seen an interest rate increase and who are feeling apprehensive about adding higher home loan repayments to their mounting living costs,” Mr Mickenbecker said.

“Borrowers have to expect multiple rate increases after the initial Reserve Bank move, historically six or eight increases over the ensuing couple of years, this time around adding 1.65 per cent to 2.15 per cent to their interest rate.”

The impact from a mortgage rate increase of just 0.5 per cent would send the average variable home loan rate to 3.49 per cent, adding an extra $137 to the monthly repayment for a $500,000 loan over 30 years.

In comparison, if the cash rate rose by as much as 1.65 per cent and the average variable rate reached 4.64 per cent (on the above-mentioned loan), this would add $470 to monthly repayments or an extra $108 to weekly expenses.

As property prices soared in recent years million-dollar loans have become “anything but rare” that will add significant pressure on borrowers with larger loan sizes when interest rates change, Mr Mickenbecker said.

“If the average variable rate rose by 1.65 per cent, the increase to monthly repayments on a one million dollar loan would be close to $940, or $217 extra per week,” Mr Mickenbecker said.

“Increasing home loan repayments by more than $200 a week puts the price increases at the supermarket and petrol bowser into the shade, and demands that, if they can, borrowers should be looking for a lower rate loan now before higher interest rates take the opportunity away.”

[Related: Regional home guarantee set to make a 'real difference']

You need to be a member to post comments. Become a member for free today!
Share this article

Join Australia's most informed brokers

Do you know which lenders are providing brokers and their customers with the best service?

Use this monthly data to make informed decisions about which lenders to use. Simply contribute to the survey and we'll send you the results directly to your inbox - completely free!

brokerpulse graph

What are the main barriers to securing a mortgage at the moment?