Aussie households facing ‘debt bomb’ as interest rate hikes loom

New research from home loans marketplace Joust and Digital Finance Analytics (DFA) show approximately 42.2 per cent of mortgaged households were currently deemed to be in financial stress in March 2022.

Households that consistently spend above their net income are deemed in “mortgage stress” by DFA.

According to the data, an interest rate rise of just 0.5 per cent would see 143,124 additional Australian households impacted by mortgage stress while a one per cent rate rise would impact 321,874 additional households

A three per cent rise would result in 933,425 more households under mortgage stress compared to current levels.

For context, scores of economists are now predicting the Reserve Bank of Australia will hike interest rates tomorrow by 15 basis points from 0.1 per cent to 0.25 per cent – well short of the one per cent mark.

But it may not take long. A poll of 32 Australian economists showed that more than half believe that Australia’s official cash rate will rise to one per cent by the end of September and move to 1.50 per cent by the end of the year.

The fear is that a sharp rise in interest rates will weigh on the wallets of households already strained by record-breaking inflation and fuel prices.

“Households are clearly feeling the ‘hip pocket’ pinch, thanks as well to higher costs of goods and services, fuel, childcare and healthcare costs as inflation hits pre-GST levels,” the researchers said.

“It’s no surprise then that Australians are keen to ensure they have the best deals available when it comes to their home loans.”

“Over the last month Joust has seen the biggest increase in applications for refinance using its platform since it launched in 2020.”

So will an avalanche of rate rises result in widespread mortgage defaults?

Unlikely, according to licensed financial advisor and Money.com.au spokesperson Helen Baker.

An independent panel of 1018 Australian mortgage holders that was commissioned by Money.com.au found that 80 per cent of respondents had a buffer prepared to deal with anticipated rate hikes.

“The research also found that 20 per cent of borrowers had no buffer at all. There are many circumstances that might have left borrowers in this situation. Jobs in some sectors were impacted heavily by Covid and some borrowers might have been living on their savings while getting back on their feet,” Ms Baker said.

“A small proportion might not be proactive savers. Others might have used their savings buffer to clear some debt rather than borrow a higher amount and retain a buffer on a new property.

“Older borrowers may have also used their buffer to re-invest in property while interest rates were low.”

Ms Baker said the research revealed a realistic attitude from many borrowers, who knew historically low interest rates would only be temporary.

“The research suggests a strong proportion of Australians are financially savvy and may have already been proactively preparing for expected increases in interest rates and the cost of living during the life of their home loan, as well as future changes in their personal circumstances that would impact their income, such as starting a family,” she said.

“Many may have known that the era of cheap money would eventually come to an end.”

The information provided on this website is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information on this website you should consider the appropriateness of the information having regard to your objectives, financial situation and needs.