Most borrowers will be under serious financial stress if interest rates rise above 5%

Home loan owners have been feeling the squeeze lately. In the past few months alone, rising inflation, cost of living pressures, and a long awaited RBA cash rate decision have been fuelling a fixed-rate hike scramble. 

Customers at major Australian banks, including CommBank, NAB, ANZ, and Westpac, have been especially affected, which is bad news for the nearly 80% of Aussies with a Big Four home loan.

As a result, almost all fixed offers with interest rates below 2% p.a. have evaporated from the market entirely.

Now, new Mozo research reveals that by the time rates hit 5% (possibly as early as June 2023), over two thirds (64%) of borrowers could be under serious financial stress.

RELATED: How to handle all the rate rise talk

Since November 2020, the official cash rate has been pegged at an 0.1% all-time low to offset the pandemic recession and encouraging spending. 

Lenders cut home loan interest rates accordingly, which lured cashed-up buyers all over Australia into the property market and sparked the enormous 2021 property boom. 

However, the Consumer Price Index rose a startling 5.1% last quarter, signalling dire runaway inflation. In response, the RBA announced on 3 May after its monthly board meeting that it would be lifting the cash rate 25 basis points to 0.35%.

While this is good news for savings accounts and term deposits, a cash rate increase will inevitably push up home loan costs as well – especially for variable home loans.

Fixed home loan interest rates have rapidly risen back to pre-pandemic levels:

“The last cash rate increase was over 11 years ago, so many borrowers will have never experienced a home loan interest rate hike,” says Mozo spokesperson, Tom Godfrey. “It’s little wonder many people are worried about the impact it could have on their finances.”

Concerningly, Mozo found that 8% of borrowers believe any home loan rate increase would put them in serious financial trouble. More than half (55%) hadn’t even stress-tested their ability to make repayments at a higher rate.

“It’s never too late to stress test your ability to make repayments,” Godfrey advises. “Something as simple as putting your home loan amount into a mortgage rate change calculator can help you to budget and reduce your stress.”

Rising interest rates may also be causing falling house prices, with more than half (59%) of homeowners fearing losing equity in their home as a result.

“Losing equity in your home could become a problem if you’re forced to sell or refinance,” warns Godfrey, “but if you’re able to hold on, continuing to pay down your principal is one of the best safeguards you can put in place.”

Economic uncertainty can make it hard to gauge where the home loan market will ultimately go. Research is therefore key to handling rising living costs and rate changes.

For example, while most Aussies bank with the Big Four, many online lenders offer more competitive interest rates. Currently, the cheapest available in Mozo’s database is from Reduce Home Loans, with a variable rate of 1.79% p.a. – over 120 basis points cheaper than the average variable home loan rate of 3.02% p.a.

RELATED: Home loan rate check: How do ANZ, CBA, NAB and Westpac compare?

Multiple lenders also offer nearly $3,000 cashback to refinance your home loan, while CommBank’s new green home loan program rewards eco-friendly customers with cheaper variable interest rates. 

“Comparing what’s on offer and switching to the best deal you can find might help to offset future rate increases,” says Godfrey.

So whether you budget or refinance, it’s time to plan for what’s to come.

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