1 in 7 Australians say they would struggle to make their mortgage repayments if interest rates rose

1 in 7 Australians say they would struggle to make their mortgage repayments if interest rates rose
Australians would struggle to make their repayments should interest rates rise. (Brent Lewin, Bloomberg via Getty Images
  • Property prices are booming on the back of record low interest rates but future rate hikes could threaten to default some buyers.
  • New analysis shows 15% of mortgage holders don’t know how they would make repayments if rates were to rise.
  • Around half are otherwise concerned, with as much as 75% of take home pay in some cities being spent on repayments.
  • Visit Business Insider Australia’s homepage for more stories.

A rock bottom interest rate environment is helping funnel buyers into the property market but when they rise again, many could be forced straight back out.

New research shows more than half of all mortgage holders are concerned about the implications of rising rates, with 15% of Australians unsure of how they will make their repayments when they do.

The data, produced by Finder, raises questions of the sustainability of the property boom, which has seen prices rise nearly 20% in the last 12 months.

“Low interest rates have encouraged many buyers to purchase earlier than they otherwise might have for fear of missing out,” head of consumer research Graham Cooke said.

“But not all of them will have budgeted for their monthly repayments to go up if or before the cash rate increases.”

The Reserve Bank of Australia (RBA) has kept the official cash rate at 0.10% for the last nine months, the lowest level ever experienced in Australia.

While most major banks expect the central bank to wait until 2024 to hike again, it is yet another sign of the pressure building in the market.

Separate analysis indicates Sydneysiders are spending more three-quarters of their take home pay on average servicing their mortgage, the highest in the country. It’s no coincidence as prices in the Harbour City outstrip national growth, and buyers take on more debt to keep up.

The average Melburnian is spending 57 cents out of every take-home dollar on repayments. Home owners in Canberra and Hobart are similarly forking out just shy of 50 cents.

Typically, any household paying above 30% of their pre-tax income is considered to be under mortgage stress. Pre-tax Sydneysiders are paying almost twice that at nearly 60%, according to ABS data. The average owner in Melbourne is shelling out 44.5%, almost 39% in Hobart and nearly 38% in Canberra.

It suggests there is little room in household budgets to deal with multiple hikes. The Commonwealth Bank has previously forecast rates could hit 1.25% by 2023, which would see Australians spend around $26 billion more on interest payments alone.

The reality has concerned regulators for months. One possible change could force lenders to bake in larger interest rate buffers when approving a loan as part of a rumoured lending intervention.

It is all but certain the RBA won’t lift rates when it convenes for its September meeting on Tuesday. In fact, the central bank hasn’t lifted the rate since late 2010 when the cash rate was set at nearly 5%.

But if and when they do, a hike could inflict a whole lot of pain for those who bought beyond their means.