Many homeowners may be forced to tighten their belts after the Reserve Bank of Australia lifted the cash rate by half a percentage point, sending an estimated 200,000 households into mortgage stress.
On Tuesday, the RBA raised the official cash rate 50 basis points to 1.35% – the highest since May 2019.
The RBA governor, Phillip Lowe, said the move was needed to try to curb inflation, after record low rates bolstered the economy, particularly during Covid lockdowns.
“The resilience of the economy and the higher inflation means that this extraordinary support is no longer needed,” he said.
If passed on in full by the banks, borrowers with a $500,000 loan over 30 years could see repayments increase by $350 a month, according to financial comparison website Canstar.
Since May, when the cash rate lifted twice, borrowers on the same loan have already been paying an extra $207 in repayments.
Determining the exact number of households suffering from mortgage stress is near impossible but founding principal of Digital Finance Analytics, Martin North, estimates the figure at about 1.69 million.
“This is before the rate rise, which is going to put more pressure on households,” North said.
“To put it another 50 basis points, we could see another 200,000 tipping over into mortgage stress in the next few months,” he said.
Each month, North surveys thousands of households on their financial position. He defines a household under mortgage stress as one that is “effectively spending more than they are receiving”.
Two previous rate increases are already having a big effect on households, he said.
“In the analysis we did for the end of June, mortgage stress rose significantly. It’s now 45.1% of households,” North said.
“It went up from 43% to 45% in a month.”
North said people will prioritise paying their mortgage and cut spending elsewhere – such as on dental care, cancelling their health insurance, changing where they shop or ending entertainment subscriptions. But with income growth still low, more people will get into trouble, he said.
“We are leveraged to the hilt but it’s not equally. About one-third of households are doing fine, they’ve got plenty of buffers,” he said.
“My concerns are the households living paycheque to paycheque with no buffers, and the households in the middle who up until this point managed their finances. They’re looking at a deep hole, incomes are not rising but costs are.”
Legal director of mortgage stress Victoria at Westjustice, Matthew Martin, said his organisation has seen more than 70 clients in the past two months.
“As interest rates rise, demand has risen,” he said. “We’re seeing an increase of clients coming to us at the late stages of mortgage stress, where they are at risk of being repossessed.
“Of those , one-third are impacted by family violence and poverty, one-third have been impacted by Covid-19 and employment difficulties, and 60% are experiencing mental health issues as a result of mortgage stress.”
Martin said banks are acting “aggressively” in repossessing homes, even when someone can prove they are able to finance the base payment on their loans.
“We are calling on the banks to show some more compassion to only use repossession as a last resort and to try and speak to their customers about the other options available to them,” Martin said.
Although the rate increase will affect everyone with a mortgage, there are concerns it will hit first homebuyers hardest, Canstar’s editor-at-large, Effie Zahos, said.
“For a lot of people we keep hearing ‘yes, we are ahead, yes, we have the equity,’ a lot of people are insulated,” she said.
“That’s well and good for customers who have their mortgages for some time but for first homebuyers, that’s not the case. Looking at Equifax data, we can see arrears rates for loans 90 days plus have trended upwards.”
First homebuyers are twice as likely as other mortgage holders to be in arrears, she said.
“They would have jumped in when rates were low, [when] the RBA said they won’t see a rate hike until 2024,” she said.
“They’ve got a home loan and then thought, well I need a car, or I’ll put in a home office, and spending continued. They’re at the mercy of the household budget.”
Households who are worried should speak to their bank, and try to haggle on rates, she said.
“I suspect banks are gearing up for a lot more phone calls,” she said. “They’re prepared for their customers to say ‘hey I know you’re giving better rates’, RBA data shows there is a 0.5% difference between new and existing customers – that’s another rate hike.”
The other option is to shop around. The number of borrowers refinancing to a new lender increased in May, with over 36,000 owner-occupied and investment loans refinanced, Zahos said.
“You can easily refinance, but who’s to say they will stay cheap? That’s when a deal can easily turn if they don’t have to pass on rate cuts. It’s no guarantee but it gives you some reprieve.”