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One in three borrowers on the brink of financial stress

Borrowers are starting to feel the pinch of rising living costs, with one in three now on the brink of financial stress, according to new data.

A new survey of 900 mortgage holders from Canstar shows 19 per cent of borrowers would be pushed into financial stress with as little as a $100 per week increase in living costs, with 14 per cent of respondents already at their financial limit.

An increase in living costs by $101 to $200, would push a further 23 per cent of borrowers into financial stress with an increase of between $201 to $500 sending another 34 per cent over their limit.ย 

Canstar’s finance expert, Steve Mickenbecker said rising inflation is pushing people over the edge financially.

“Household incomes are falling far behind the cost of living at the petrol bowser, in the grocery trolley, and for insurance premiums,โ€ Mr Mickenbecker said.

โ€œHouseholds with a mortgage who are already at their limit will face dire financial stress when interest rates begin to rise.โ€

Source: Canstar

Mr Mickenbecker said the likelihood of the Reserve Bank lifting the cash rate could have severe consequences for some borrowers.

“There is a whole generation of borrowers who have never seen an interest rate increase and who are feeling apprehensive about adding higher home loan repayments to their mounting living costs,โ€ he said.

“When the Reserve Bank lifts the cash rate for the first time since November 2010, existing borrowers with variable interest rate loans will also be feeling the pinch of monthly loan repayments.

“Borrowers have to expect multiple rate increases after the initial Reserve Bank move, historically six or eight increases over the ensuing couple of years, this time around adding 1.65 percent to 2.15 percent to their interest rate.”

According to Canstar, if interest rates rise by just 0.5 per cent it would send the average variable home loan rate to 3.49 per cent and add an extra $137 to the monthly repayment for a $500,000 loan over 30 years. This equates to an extra $32 per week in the household budget.ย 

If the cash rate rose by as much as 1.65 per cent, as forecast by Westpac, and the average variable rate reached 4.64 per cent, this would add $470 to monthly repayments or an extra $108 to weekly expenses.

Mr Mickenbecker said with the high property prices that weโ€™re experiencing, even small increases in interest rates can have a large impact on households.

“With property prices moving up by as much as they have over the past couple of years, million dollar loans are anything but rare, they are almost the norm for more recent buyers,โ€ he said.

“If the average variable rate rose by 1.65 per cent, the increase to monthly repayments on a $1 million loan would be close to $940, or $217 extra per week.ย 

“Increasing home loan repayments by more than $200 a week puts the price increases at the supermarket and petrol bowser into the shade, and demands that, if they can, borrowers should be looking for a lower rate loan now before higher interest rates take the opportunity away.”

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Rowan Crosby

Rowan Crosby is a senior journalist at Elite Agent specialising in finance and real estate.