The Mortgage Cyclone Wiping Out Half Your Income

New consumer research from financial comparison site Mozo reveals 1 in 6 Australians are having half their income wiped out by rising rates, using 40-60% of their monthly household income to cover their mortgage.

“Even though the RBA is likely to hold the cash rate at 4.10 percent today, the research shows that twelve rate rises are putting significant pressure on household budgets,” Mozo money expert Rachel Wastell said. 

“39 percent of homeowners admitted to paying more than 30 percent of their monthly household income to their home loan lender, and that 30 percent figure is the standard ratio for identifying mortgage stress.”

When asked ‘What percentage of your monthly income is your mortgage’ Mozo survey results showed roughly 1 in 5 Australians (18%) are paying between 30-40% of their household income toward their home loan. 

A further 1 in 6 (16%) are paying roughly half of their income to lenders (40-60%), and 1 in 25 (5%) are coughing up more than 60% of their income to keep a roof over their head.

“Spending half of a household’s monthly income on a home loan may seem staggering, however the shift from the covid-era of ‘free money lending’ and ultra-low rate loans, to much higher rates in such a short space of time, means that this stress is not entirely surprising,” Wastell continued.

“For borrowers struggling with rising repayments that are now devouring half their paychecks, it pays to call your lender and see if you can get a better deal.”

1 in 3 (31%) of those surveyed confessed they’ve never refinanced, despite having a mortgage for over a decade, signalling an opportunity for some borrowers to negotiate a better rate, to reduce mortgage stress.

THE COST OF FALLING OF THE FIXED RATE CLIFF 

According to Mozo analysis, switching from a rate starting with 2, to one starting with 6, could mean an extra $780 a month in repayments on a $350,000 home loan over a 25 year loan term. The same rate change on a $1,000,000 mortgage, over the same period, equates to a whopping $2,229 a month more.

For many of the homeowners surveyed, this is their reality. 2 out of 5 surveyed said they had already switched from fixed rates starting with 1 or 2 to variable rates starting with 5 or 6.

A further 5% surveyed said they had switched from fixed rates starting with 1 or 2 to variable interest rates over 7%. Based on the analysis, homeowners with a $500,000 loan are searching for an additional $1,430 every month over a 25 year loan term, or $2,144 a month on a $750,000 loan over the same term. 

The survey results further support the above analysis, with most (37%) Australian homeowners saying they were struggling to find hundreds of dollars more every month to meet repayments, with 1 in 6 (16%) paying over $1,000 more a month.

1 IN 5 COULD SEE RATES DROP BEFORE FALLING

1 in 5 (23%) homeowners surveyed who are teetering on the fixed rate mortgage cliff,  and have yet to feel the pinch of rising rates, could see an RBA rate cut before they switch into variable rate territory.

“If the major banks are right, it looks like we’ll see rates drop late next year,” Wastell said, “Westpac, ANZ and NAB are all betting on a rate cut from September onwards, and the latest cuts to one and two year fixed rate home loans across the market support this view.”

“We’re also seeing cuts to variable rates, like NAB’s 96 basis point cut to its base variable rate home loan for those making principal and interest payments, and the growing number of home loans in the Mozo database starting with 5.”LOW RATE HOME LOANS STARTING WITH 5

“Although the latest CPI data showed the first uptick in inflation since April, it was primarily driven by volatile items like fuel,” she continued, “without those items, inflation actually eased in August.” 

“It’s likely the RBA will be factoring this, and the fact that monetary policy works at a lag, into consideration when they make their decision today, where we are likely to see the cash rate held at 4.10 percent.”