Melbourne suburbs where rate rises will lift mortgage stress most

The Reserve Bank is tipped to raise interest rates up to 1 per cent in the next 12 months, and these Melbourne suburbs will suffer the most mortgage stress.

Almost 88,000 Melbourne households will slide into mortgage stress if interest rates increase by 1 per cent, and the suburbs under threat are not just the traditional battlers.

Suburbs with young affluent households – including Glen Waverley, Ringwood and Eltham – will be among the hardest hit by rate rises after soaring home values inflated mortgage sizes, according to new data from research firm Digital Finance Analytics.

The biggest increase in mortgage stress will be in postcode 3977, home to Cranbourne, Cannons Creek, Skye and Junction Village, with 3258 newly-stressed households.

The research found suburbs with “exclusive professionals” such as Hampton and Mount Waverley would also experience sharply higher stress levels.

Mortgage-stressed households are those with a home loan that spend more each month than the income they receive. Melbourne currently has more than 433,000 homes in mortgage stress.

Digital Finance Analytics principal Martin North said there had been a “pincer movement” where people were getting larger home loans as house prices surged, but rising incomes were not keeping pace.

“Some of those are not used to being in a situation where their finances are under pressure,” he said.

Mr North said mortgage stress was already high in outer suburbs such as Narre Warren and Point Cook where there had been a lot of new development.

“A lot of those outer suburbs and high growth areas are where we see problems,” he said.

“About 41 per cent of households across the country are in mortgage stress at the moment, which is 10 per cent higher than before Covid hit. The average mortgage is about 50 per cent bigger than it was before Covid.”

Mr North said he was seeing more 30-year mortgages in Melbourne where “you will pay a lot more in interest”.

Tribeca Financial director of lending Jason Kloszynski said a significant proportion of borrowers had never experienced an interest rate rise, and the price growth of the past two years had added “fuel to the fire of bullish optimism”.

“Cheap money has encouraged them to leverage equity to renovate, extend and refurbish, upgrade cars and generally be less cautious about the inevitable rainy day,” he said.

“We see many instances where clients are failing to see the surge in their household expenditure and the closing gap of surplus cash at the end of each pay cycle.”

Mr Kloszynski said while it was obvious that battler suburbs would be hit by rate rises because of their lower disposable incomes, there were risks that eastern suburbs and near-city locations would also be hit hard.

He said maintaining an excellent credit repayment history at all times was imperative.

“Missing a repayment here or there even once or twice by a few days is a red flag for any lender.

“In the event mortgage stress leads to needing your bank’s help in the future, a poor credit history in the good times doesn’t bode well.”

Originally published as Melbourne suburbs where rate rises will lift mortgage stress most