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

A white house rides a rising interest rate line on a blue field.

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

Home-buyers who benefited from the 2021 property boom now facing serious financial music

Blue and purple cartoon house steps with rising interest rate arrows.

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.”

Loan details

Rate change

Repayment change if rates go up

What can borrowers do to handle rising interest rates

A woman runs along a green path collage out from her laptop.

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.

Looking for the best home loan? Compare a selection below, or head over to our home loan hub for more guides and updates.

Compare home loans - last updated 13 August 2022

Search promoted home loans below or do a full Mozo database search . Advertiser disclosure
  • Variable Home Loan 70

    interest rate
    comparison rate
    Initial monthly repayment
    3.10% p.a. variable
    3.12% p.a.

    Affordable home loan rate for buyers or refinancers.. No monthly or ongoing fees. Option to add an offset for 0.10%. Access to savings with unlimited redraws available. Minimum 30% deposit required.

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  • Unloan Variable

    Owner Occupier, Refinance Only

    interest rate
    comparison rate
    Initial monthly repayment
    3.14% p.a. variable
    3.06% p.a.

    For refinancers only. Built by CommBank, the Unloan is the first home loan with an increasing discount (conditions apply) for borrowers. No application or banking fees. No monthly account keeping or early exit fees. Apply in as little as 10 minutes.

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  • PAYG Home Loan

    Owner Occupier, Principal & Interest, LVR<80%

    interest rate
    comparison rate
    Initial monthly repayment
    3.29% p.a. variable
    3.33% p.a.

    Low variable rate. Ideal for new home buyers or refinancers. Unlimited additional repayments. Unlimited free redraw. Application completely online. Optional 100% offset can be added for $120 p.a.. 20% deposit required.

    Details
  • Celebrate Variable Home Loan

    <60% LVR, Owner Occupier, Principal & Interest

    interest rate
    comparison rate
    Initial monthly repayment
    3.79% p.a. variable
    3.79% p.a.

    Fast and efficient online application. Automatic discounts as loan is paid down. Free extra repayments and redraw facility. Zero fees. Min 40% deposit required.

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* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.

** Initial monthly repayment figures are estimates only, based on the advertised rate, loan amount and term entered. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.

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