Rising costs spell trouble for one in three borrowers - research

Just under a third are at their limit

Rising costs spell trouble for one in three borrowers  - research

Rising living costs and interest rates threaten to push one in three borrowers into financial stress, according to new research.

Weekly living costs are on the rise. Australian Bureau of Statistics figures show consumer prices rose 3.5% in December 2021, compared to December 2020. Transport costs were a key contributor and global oil prices have pushed up pump prices.

The cash rate, currently 0.10%, is tipped to rise from mid-year, putting extra pressure on highly mortgaged households.

Read more: RBA makes last cash rate call for 2021

An online survey conducted by financial comparison website Canstar of more than 900 mortgage borrowers from January to February showed one third are close to the edge, while 14% were already at their limit.

For 19% of respondents, a weekly increase in living costs of up to $100 would be enough to create financial stress.

A cost rise of $101 and $200 per week would be felt by almost a quarter (23%) of those surveyed.  A third (34%) said an increase between $201 and $500 would push them over their limits.

Canstar finance expert Steve Mickenbecker said household incomes were falling far behind the cost of living.  Increases were seen not only at the petrol bowser, but also in the supermarket trolley, and in the cost of insurance.

He said when interest rates begin to rise, households already at their limit would be the first to feel the pinch.

“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,” Mickenbecker said.

When the cash rate eventually increases, existing borrowers with mortgages on variable interest rates will be forced to accommodate higher monthly repayments.

“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 % to 2.15 % to their interest rate,” Mickenbecker said.

Canstar analysis showed a rate increase of 0.50% would send the average variable home loan rate to 3.49%. For a $500,000 loan over a 30-year term, it would add an extra $137 to the monthly repayment cost.

It would require households to find an extra $32 per week in their budget.

If the cash rate rose to 1.65% (based on a Westpac’s forecast to 2024), and the average variable rate reached 4.64% based on the same loan, monthly repayments would increase by $470, Canstar said.

Homeowners with larger amounts of borrowing were likely to find their finances squeezed even tighter. 

“With property prices moving up by as much as they have over the past couple of years, million-dollar loans are anything but rare, they are almost the norm for more recent buyers,” Mickenbecker said.

Asked whether mortgage borrowers were likely to be the more exposed to cost of living and interest rate rises, Graeme Holm (pictured), director of brokerage Infinity Group Australia, said over the last few years loan applications had been assessed at buffered interest rates of about 5% to 6%.

For most borrowers, that would mean mortgage rates would have to be at least double, before mortgage stress occurred.

In the event of significant interest rate increases, Holm said years of experience showed a household would simply “reign in discretionary spending” on non-essential items, such as takeaway food, coffee, and alcohol.

A $200 per week increase in home loan repayments put price increases at the supermarket and petrol bowser “into the shade,” Mickenbecker said.  He suggested borrowers should be looking for a lower rate now before higher interest rates “take the opportunity away.

But the rate was “only one facet of a loan”, Holm said. Before recommending customers refinance to a lower rate, Holm said it was important that brokers consider customer needs, such their ability to repay a loan over a shorter term. 

There may be a product with a higher rate better suited to the customer.

“For example, what appears to be a low fixed rate loan with no offset or ability to make additional repayments for 1.99% for three years can leave a borrower worse off, in direct comparison to a loan that is variable with offset, or the ability to reduce the interest charges and loan balance at a faster rate even if the rate was 2.29%,” Holm said.

Read more: Getting financially fit at Infinity Group Australia

The ability to make extra repayments beyond the minimum scheduled repayments was an important consideration, he said.  Through the guidance of a mortgage broker, customers had the opportunity to better understand how they could structure their current loan to potentially negate future rate increases.  

“It is imperative our industry stops rate bait and starts to educate consumers on repayment capacity and frequency among other considerations,” Holm said.

Holm acknowledged there was a small portion of customers who were leveraged to a dangerous level.  But in most cases borrowers could mitigate rate increases by “altering poor lifestyle choices” or streamlining their discretionary spending, he said.