With interest rates at record lows, its concerning that 30% of owner-occupied homes across Australia homes are already experiencing mortgage stress. This equates to almost 1-million properties Australia wide; mainly in Sydney and Melbourne.
If 30% of owner-occupied homes across Australia are already experiencing mortgage stress, what’s going to happen to these households when interest rates rise? How many more households will be experiencing mortgage stress? How many Australian’s will default on their home loan? How will this impact our economy?
This concern is shared with our Government and RBA and provides some insight as to why RBA have continued to hold cash rates at 1.50% for 27 consecutive months.
The RBA is acutely aware of the potential and additional mortgage stress Australians will face with raising cash rates. The RBA are constantly considering these factors along with the lack of income growth, unemployment rates and continual increase in living costs.
The Royal Commission (RC) recently enforced tighter lending requirements on banks. particularly lending requirements in association with properties held through Self-Managed Superannuation Funds (SMSF). To find out more about the RC SMSF property findings, refer to my blog here.
Additionally, Interest Only loan offerings have been significantly reduced for new property purchases or loan refinances.
Recent tax cuts commencing 1 July 2018 were introduced to help sustain household expenditure. The Government was also reviewing proposals for reduced electricity rates before the spill. Electricity prices have since been removed from the Governments main agenda.
The average mortgage nationally is just under $500,000 and 1 in 4 owner-occupied loans are interest only. Let’s put a scenario together to really understand the potential impact raising interest rates can have:
That’s a staggering increase and a concerning jump in annual expenditure if you are not expecting and are not prepared for it.
Although 2% is a reasonable increase to consider for the short-term (0-3 years), what if interest rates increased greater than 2%? How will this affect your livelihood?
If you are already experiencing mortgage stress, or feel that you will when interest rates rise or once your interest only term ceases, contact us today for a complimentary discussion on how you can regain control of your finances.