The true cost of interest rate rises

Financial Planning, Investing, Lifestyle
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Startling new data shows the average Australian homeowner is forking out almost half of their salary on mortgage repayments, thanks to the painful run of interest rate rises.

Everyone knows the Reserve Bank’s war on inflation is hurting. You only need to ask those around the table at your next dinner party or backyard barbeque how they’re faring, and most will admit to slashing non-essential spending to take some pressure off.

So, where are Aussie household finances sitting right now?

Massive increase in costs

The Real Estate Institute of Australia just released figures that show how tough things are for most borrowers. Its data revealed that after 13 rate hikes in 18 months, the typical household must now devote 48 per cent of their pay to servicing their home loan.

The credit agency Moody’s recently released some stark numbers of their own, showing mortgage repayments have skyrocketed by 44 per cent per month since mid-2022, while at the same time the average full-time salary has only nudged upwards by seven per cent.

The Reserve Bank continues to insist that the risk of households falling seriously behind in their mortgage repayments is low. They say most Aussies managed to save a healthy buffer during the early Covid era when general living expenses plummeted, so most of us are in solid positions.

But experts aren’t convinced. Significantly higher mortgage repayments coupled with a painful cost-of-living crisis have pushed many households to the brink.

Data released this week by Bloomberg found mortgage arrears have increased at the fastest level in almost two years. It found almost 1.9 per cent of borrowers are now behind on repayments.

More and more needed

When rates began to rise sharply, most economists and property pundits expected real estate values would start to fall. But that didn’t happen. Instead, prices skyrocketed in virtually every part of the country.

Just look at the past 12 months alone. According to the PropTrack Home Price Index for March, national dwelling values are up 6.79 per cent year-on-year. At a capital city level, home prices are 7.64 per cent higher than they were 12 months ago.

And in major cities, home prices annually are up 8.1 per cent in Sydney, 12.9 per cent in Brisbane, 13.4 per cent in Adelaide, and 18.6 per cent in Perth. Only those buying in Melbourne have had some reprieve, with a modest 1.7 per cent increase over the past year.

So not only are current buyers forking out more in interest, but they’re needing to spend more to get their foot in the door of a home.

The latest data from the Australian Bureau of Statistics shows that the size of the average new mortgage in January was 615,000. When you factor in a 20 per cent deposit, that means the typical property purchase price was about $768,000.

Based on the current standard variable interest rate, that average borrower is forking out more than $3700 per month – or some $45,400 per year. 

In pricier parts of the country, the scenario is even bleaker. In New South Wales, where you’ll find the most expensive properties in the country, the average new home loan in January was $770,000, the ABS data shows.

That equates to more than $4700 per month in repayments or almost $57,000 per year, which is a mammoth amount.

Saving a deposit is harder than ever

Another part of the property puzzle that’s making things tough is the astronomical cost of renting a home.

When you’re a hopeful first-home buyer trying to scrape together a deposit – an amount that’s getting bigger as property prices rise – it can be tough to have much, if any money left over after servicing a huge lease.

Again, if we take a look at Sydney, for example. The median weekly house rent has surged over the past year to reach $1050, according to SQM Research. Median weekly unit rents are also up, increasing by 9.1 per cent to $705 per week.

That’s at a whole city level, too. In some particularly sought-after suburbs, asking rents have leapt by 20 per cent or more, according to media reporting.

When you’re a young couple trying to come up with a 20 per cent deposit, needing to fork out thousands of dollars more per year for rent can seriously impact your savings ability.

The worst thing you can do

Whether you’re a homeowner battling rising mortgage costs and worried about your position, a would-be buyer who isn’t sure what their position is, or a first-home buyer losing hope, the worst thing you can do… is nothing.

If you’re feeling the weight of repayments, talk to us about the health of your home loan. If you haven’t made any adjustments in a while, chances are you’re paying too much. There could be some serious savings to be found by refinancing.

And the mortgage market right now is very competitive. Rates are normalising but it is still a competitive market and lenders will compete to “win” your business.

If you’re looking to buy, whether for the first time or not, working with a qualified expert mortgage broker can open new horizons you didn’t know existed. From assessing your personal circumstances to sniffing out the absolute best deals in the market, we can take the stress of uncertainty out of the buying process by helping you understand where you sit.

Doing nothing can turn into a nightmare. Going it alone can be painful and fraught with disaster. The solution is to talk to us about how we can help.

If you want to learn more about how a mortgage broker can help you with your financial goals, book a complimentary meeting with one of our experienced brokers.

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Andrew Mirams