Home loan stress: Are you at risk if the RBA lifts interest rates in 2017?

One in five owner occupiers are at risk of plunging into severe financial stress, if predictions ring true and the RBA lifts rates mid 2017, according to new research.  

Investment site Macro Business tested hypothetical rate hike scenarios and found that certain clusters of Aussie homeowners could potentially default on their loans.

The publication noted that owner occupiers living in NSW are most sensitive to interest rates, due to the size of mortgages in the state relative to their incomes.

Young people with home loans are also at risk financially, as their salaries wouldn’t climb on par with increasing repayments like older age groups.

This comes as Mozo’s Product Data Manager, Peter Marshall along with other interest rate experts in the industry are tipping for the Reserve Bank to lift rates by mid 2017.

“There could easily be two or three 25bp increases before the end of the year, as I expect that we will see inflation increase over the next six months,” said Marshall.

He added that although mortgage rates in Australia have remained at historically low levels for a while now, the time has come for them to normalise.

Marshall advised borrowers to start budgeting for higher loan repayments in the future, or consider refinancing over to a fixed rate now before it’s too late.

How expensive is a 25bp rate rise?

For homeowners paying off a mortgage at the average standard variable home loan rate of 4.40%, our rate change calculator shows that even slight increases add up.

Scenario: Say an owner occupier was paying off a $900k home loan over 20 years, and his or her home loan provider lifted the interest rate by 25 basis points. Monthly repayment bills would rise by $122 to $5,767, or an extra $1,464 in total for a year.  

Tips on protecting yourself from an interest rate climb

• Take out mortgage protection insurance, which will cover home loan repayments for a set period if you lose your job or fall ill.

• Build up a buffer in your offset account that you can dip into it when needed. Or, deposit funds into your savings regularly to help absorb financial shocks if they arise in the future.  

• Stay ahead on your repayment schedule if you have the extra cash, so you can draw on those additional repayments when money gets tight.

Want to keep tabs on the RBA? Once the board meets on February 7 and they announce their cash rate decision, you can read a detailed report about it at our dedicated RBA page.