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Mortgage stress: How to know if you’re at risk when interest rates rise

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Homeowners face their first rate hike in 11 years, but there are warnings they need to act quickly to avoid falling into mortgage stress.

A shocking number of Australians are already estimated to be experiencing mortgage stress – meaning they are struggling to repay – even before interest rates can be raised to 2% by the end of the year.

Interest rates sit at a record low of 0.1%, but the Reserve Bank of Australia gave its biggest hint that a hike is imminent, with experts pegging June for the first hike.

But according to Roy Morgan, around 584,000 mortgage holders were already at risk of mortgage stress at the end of 2021, said Bill Tsouvalas, Savvy’s chief executive and home finance expert.

“This is after many government interventions such as extended payment holidays, JobKeeper/JobSeeker, Covid disaster payments etc,” Mr Tsouvalas added.

A person is considered to be in mortgage trouble if more than 30% of their income is spent on their loan.

Whether more people fall into mortgage stress could depend on whether wage increases keep up with inflation, which has not been the case so far in Australia.

While Australians’ pay rose 2.3% per annum overall last year, it was well below inflation which sits at 3.5%, meaning the cost of goods is absorbing any additional pay.

If a two-person household with a combined average income of $135,720 got a 2.3% wage increase, that would be $3,121 more per year.

A 1% rate hike on a $500,000 loan with a fixed variable rate of 2.7% would boost repayments by an additional $3,156 per year for the household.

That means they would have to come up with $35 a year to cover the mortgage, which would “barely register as a blow to the family budget and could be absorbed with little effort,” Mr Tsouvalas said.

“However, if this family doesn’t get any pay raises, they should find… $3156 more on the mortgage per year. This is easier said than done for many Australians,” he said.

“If the same family loses a significant number of working hours or suddenly finds itself on one income due to a shock job loss, that would immediately put them in mortgage stress.”

With record levels of public debt, even if wages do not keep up with the cost of living, whoever will be elected in May would still be “reluctant to bail out owners in order to create even more inflation”, added Mr. Tsuvalas.

“If you’re a landlord and you haven’t set your rates, now is the time to act,” he said.

“Refinancing at a lower rate is also best to start as soon as possible because with all the indicators pointing to rising inflation, rates will definitely start to rise.”

The last time interest rates rose was 11 years ago in November 2010, meaning more than a million homeowners could be facing their first rate hike.

Andrew Walker, chief executive and founder of digital lender Nano, said $400 billion in fixed-rate mortgages from major banks would switch to a variable interest rate over the next two years.

He said he expected many Australians to seek refinance.

“We are sitting on the edge of the fixed rate rollover cliff. The Commonwealth Bank of Australia alone is expected to have a whopping $53 billion in fixed rate mortgages converted to variable rates in the second half of 2023,” Mr Walker said.

“Assuming the other major banks mirror the same structure as the CBA, we could expect to see $400 billion of fixed rate mortgages move to a variable interest rate over the next two years.

“If market expectations for rate hikes are correct, they will be significantly higher, resulting in a sharp increase in repayments.”