Small interest rate rise would push many new homeowners off financial cliff, research reveals

Housing costs would swallow more than three quarters of residents’ income in some NSW areas if interest rates rose by just one per cent, according to new real estate analysis. Use our graphic to see how your suburb would be hit.

Even a modest interest rate rise would send many homeowners who bought recently at high prices in hundreds of NSW areas into severe mortgage stress with repayments swallowing more than a third of ­average incomes.

And in Sydney’s inner west and some coastal suburbs a small rate rise would see up to more than 90 per cent of average incomes eaten up by repayments for median priced houses.

The alarming effects of a rate rise on recent buyers who have already stretched their budgets to buy a house as real estate prices surged, and those desperate to find a home, has been ­revealed by new realestate.com.au data provided exclusively to the Sunday Telegraph.

The analysis warns even a rate rise of just half to 1 per cent would push many recent buyers who took advantage of record low mortgage rates to the edge of a financial cliff.

First home buyers Jake Wilson and Henriette Dohnt bought a home a year earlier than planned to beat a potential rate rise. Picture: David Swift

And it would make it virtually ­impossible for home seekers on average incomes to get a property loan in many areas.

It comes as economists warned of imminent rises in bank lending rates, irrespective of moves by the Reserve Bank of Australia, which has committed to keeping the cash rate at historic lows until 2024.

Lenders raised rates on at least 303 loan products in October alone, ­according to Finder.com.au, and more were expected to follow as bank operating costs increased.

Doubts were also emerging over whether the Reserve Bank could keep its promise to hold rates for another three years, with some commentators claiming the cash rate could rise as early as next year.

There are currently 343 locations across NSW where repayments on a mortgage at median house prices would eat up more than a third of the average household income in the area, according to the realestate.com.au data.

This would swell to more than 400 suburbs if rates rose by 1 per cent, which would put new buyers in a position known as “mortgage stress”.

Units were a lot more affordable by comparison and fewer areas had the same imbalance between apartment prices and incomes.

Realestate.conm.au economist Paul Ryan said homebuyers’ borrowing capacity was typically assessed on a higher rate than what they paid, many were on fixed rates, and their income tended to be higher than the average, but there were also buyers at the “margins”.

“There will be (homeowners) at the margins who haven’t prepared for rate rises. If rates do go up next year, households will have to tighten their belts,” Mr Ryan said.

“(And) more and more people will be locked out of the market.”

Housing affordability was most strained in coastal regions and Sydney’s inner west, where property prices recently skyrocketed even as wages stagnated.

Mortgage repayments on houses priced at the current median in suburbs North Curl Curl, Putney, Longueville, Collaroy and Clovelly would require about 80 per cent of the average household income of local residents if rates rose half a per cent.

A 1 per cent rate rise on top of the current average interest rate would push repayments to more than 85 per cent of average income in these areas.

Auctioneer Adrian Bo at the auction for a house that sold for $1.2m over reserve on Saturday. Picture: Sam Ruttyn

Affordability was even more stretched in the inner west suburb of Strathfield, where repayments would consume 92 per cent of residents’ average income with a half per cent rate rise and 97 per cent with a full point rise.

Mr Ryan said the extreme differences between incomes and repayments in many areas meant all but the highest earning buyers would be shut out of the market.

Recent buyers would struggle if they overstretched to get into the housing market or their income dropped after they were approved for a loan, Mr Ryan added.

“People will be hurt to different ­degrees,” he said.

“Some will have got used to lower rates and extra disposable income. They will have to cut back on spending.

“The people in the worst position will have borrowed a lot of money at low rates. They don’t have a buffer and maybe their affairs were structured differently when they got their loan.”

This Byron Bay house sold in 2021 for $4.3m, which was $725,000 above the 2019 listed price.

Loan Market-Lower North Shore broker Matt Clayton said potential rate hikes were becoming a concern for new borrowers and most of his ­clients were asking questions.

“Rate rises weren’t a huge topic of discussion not that long ago, because the RBA was saying it would be years until they raised,” he said. “One RBA meeting later and people are worried.”

Jake Wilson and fiancee Henriette Dohnt planned to buy their first home in 2022, but brought their plans forward over rate rise concerns.

“(Mr Clayton) suggested we act now,” Mr Wilson said.

“Two weeks after we were approved, we bought a place.”

The couple purchased a Dee Why unit, where they plan to live for the next five to seven years.

This rundown house near the water at 163 Princes Street, Putney recently sold for $4.55m.

“For what we borrowed, if we went back to the bank next year, we might not have got the same amount,” Mr Wilson said.

Finder home loans expert Richard Whitten said previous lending patterns showed rates would continue to rise slowly until the cash rate finally moves.

“Fixed rate loans are rising particularly sharply,” he said.

“The RBA has made it clear that the cash rate is ­unlikely to lift in the next year, but that doesn’t mean lenders won’t be getting a jump in the meantime.”