- Cash rate hike could cost homeowners 50% of income
- Fast-paced interest rate increases outpace wage growth
- Lenders' short-term hardship provisions can increase long-term costs
Mortgage repayments for a median priced house purchased in April 2022 could soon be consuming up to 50% of a couple’s income if the cash rate reaches 4.6% according to new research.
Canstar found that, should the cash rate reach 4.6%, couples in Sydney who purchased a median priced house for $1.4 million with a 20% deposit in April last year and maxed out their borrowing capacity could end up spending 50% of their before-tax income to repayments; it could be as high as 66% of after-tax income.
The situation was also looking ominous for borrowers in Canberra who could end up spending 48% of the pre-tax income on mortgage repayments, followed by Melbourne (47%), Brisbane (46%) and Hobart (44%).
Regional borrowers still faired best of all, with regional SA only needing to spend 31% of the income should rates hit 4.6%, while those in regional WA will be spending just 34%.
Borrowers struggling
Canstar’s finance expert, Steve Mickebecker said the pace of interest rate rises over the past year has resulted in an unprecedented escalation in the amount of household income that is absorbed by repayments.
“Interest rates have gone up so quickly that pay rises have gone nowhere towards covering higher repayments,” said Mickebecker.
“Borrowers who qualified for their loan at the limit of their affordability just before the Reserve Bank started to lift the cash rate last year would have no chance of qualifying for the same loan today.”
Steve Mickebecker, Canstar’s finance expert
Mickebecker said there is a rule of thumb that says contributing anything above 30% of gross income to repayments represents mortgage stress and these borrowers are way above that.
“When you pull tax and the loan repayments out, these recent borrowers in Sydney will have only 34% of their net income left,” he said.
“They will be living on around $6,000 per year more than the age pension to cover other living expenses, without the benefit of other savings and maybe bringing up a family.
“With inflation still raging, there’s just not enough cash left to cover food, clothing, electricity, phones, education, transport, insurance, healthcare and more.”
Impact of rates increasing to 4.6%
| Location | Median house price (April 2022) | Loan amount (20% deposit) | Annual income (couple) | Monthly repayment | Repayments as % of income | Leftover annual after-tax income | |||
| Before tax | After tax | Before tax | After tax | $ | % | ||||
| Sydney | $1,416,960 | $1,133,568 | $187,542 | $141,906 | $7,861 | 50% | 66% | $47,574 | 34% |
| Regional NSW | $781,391 | $625,113 | $117,576 | $96,078 | $4,335 | 44% | 54% | $44,058 | 46% |
| Melbourne | $1,000,926 | $800,741 | $141,692 | $111,874 | $5,553 | 47% | 60% | $45,238 | 40% |
| Regional VIC | $622,665 | $498,132 | $100,085 | $84,621 | $3,455 | 41% | 49% | $43,161 | 51% |
| Brisbane | $880,332 | $704,266 | $128,692 | $103,359 | $4,884 | 46% | 57% | $44,751 | 43% |
| Regional QLD | $555,277 | $444,222 | $92,915 | $79,925 | $3,081 | 40% | 46% | $42,953 | 54% |
| Adelaide | $676,546 | $541,237 | $106,086 | $88,552 | $3,754 | 42% | 51% | $43,504 | 49% |
| Regional SA | $333,565 | $266,852 | $72,416 | $64,125 | $1,851 | 31% | 35% | $41,913 | 65% |
| Perth | $578,751 | $463,001 | $95,772 | $81,797 | $3,211 | 40% | 47% | $43,265 | 53% |
| Regional WA | $413,066 | $330,453 | $80,157 | $70,240 | $2,292 | 34% | 39% | $42,736 | 61% |
| Hobart | $793,723 | $634,978 | $119,611 | $97,411 | $4,404 | 44% | 54% | $44,563 | 46% |
| Regional TAS | $549,324 | $439,459 | $92,753 | $79,819 | $3,048 | 39% | 46% | $43,243 | 54% |
| Darwin | $576,149 | $460,919 | $94,359 | $80,871 | $3,197 | 41% | 47% | $42,507 | 53% |
| Regional NT | $450,984 | $360,787 | $82,732 | $72,274 | $2,502 | 36% | 42% | $42,250 | 58% |
| Canberra | $1,070,220 | $856,176 | $149,639 | $117,079 | $5,938 | 48% | 61% | $45,823 | 39% |
| National | $818,574 | $654,859 | $121,730 | $98,799 | $4,542 | 45% | 55% | $44,295 | 45% |
Source: Canstar – 19/06/2023. Cash rate of 4.6% calculated on interest rate of 7.48%, which is based on applying actual cash rate changes since April 2022 and NAB’s cash rate forecast of +0.25% in July and +0.25% in August to the April 2022 rate. Interest rate of 2.98% for April 2022 based on the average of owner-occupier variable loans on Canstar’s database, available for a $500k loan amount, 80% LVR and P&I repayments; excluding introductory, FHB only, and other special condition loans. Monthly repayments calculated based on a 30 year loan term. Median House Price per CoreLogic Home Value Index. Borrowing power calculated assuming a loan term of 30 years, annual expenses of $31,668 for a couple, 80% of income available to service a home loan, and a 3% interest rate buffer. Gross annual income figures are rounded up to the
nearest $100. Repayments as a percent of income calculation for 4.6% cash rate takes into account annual state/territory wage growth per ABS Wage Price Index (March 2023, original values, total hourly rates of pay excluding bonuses).
Mortgage stress
He said all around the country, this scenario is playing out to varying degrees.
“Couples who took out loans for median priced houses a year ago up to the limit of their affordability now have repayments that exceed the 30% gross income threshold for mortgage stress.”
“For borrowers who are better off and have not hit mortgage stress, now is the time to refinance into a low-cost loan with savings of hundreds of dollars a month potentially on offer.
Waiting until you’re desperate is not an option as the opportunity to refinance will have dried up said Mickebecker.
“Recent borrowers who are already in stress will not find banks too receptive to helping them refinance and nor have they had time to build up their offset or redraw balances, or the latitude to extend the term of their loan.
“They will have to interrogate the household budget for ways to save elsewhere or supplement their income.”
Hardship provisions
Mickebecker said lenders have hardship provisions that can provide help for the short term.
“Borrowers should be aware that short term fixes add to the long-term cost of the loan and how long it likely takes to repay the debt.”
“They should work to get their loan back on track as soon as their financial situation eases.
“For now borrowers need to do what they can in partnership with their lender to keep their heads above water and hold on to their house.
He said it’s no time to hope the problem will go away, but it is time to get on the front foot with your lender.
“Eventually wage growth will provide financial relief and enable most borrowers to put the early 2020s behind them.”
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