How interest rate rises could send hundreds of thousands of Aussies into mortgage stress

As Australia sits on a knife edge waiting to see if interest rates will be increased, a huge number of people are already struggling.

A shocking level of Aussie households with mortgages are in trouble even before interest rates are hiked, with 42 per cent financially stressed in March, new research has revealed.

Australians are suffering from financial stress in greater numbers than at any point in the past 20 years, according to data from home loans provider Joust and Digital Finance Analytics (DFA).

In total, 1.5 million households in Australia are currently under mortgage stress, claimed DFA.

Interest rates could hit between 1-2 per cent by the end of the year, experts have forecast, while some more chilling predictions have said they could hit 2.5 per cent or more by the middle of 2023.

Some of the big banks have tipped a 0.25 per cent increase in May, while other experts have gone higher at 0.4 per cent.

An interest rate rise of just 0.5 per cent would see more than 143,000 additional Australian households impacted by mortgage stress, DFA found.

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Households that have purchased in the past two years are most vulnerable to rate rises. Picture: NCA NewsWire/David Swift

If interest rates go up by 1 per cent it would see close to 322,000 additional households experiencing mortgage stress, while a 3 per cent rise would result in 933,000 more households under mortgage stress compared to current levels, the DFA said.

Mortgage stress is defined by DFA as a household where the occupants are either able to pay their mortgage under duress or are actually behind on their mortgage.

Data from the Australian Prudential Regulation Authority is more conservative.

Its shows that 280,000 Australians are most at risk from rising rates having borrowed six or more times their income and/or have loan-to-value ratios of more than 90 per cent.

This is out of one million loans taken out in the past two years, which the RBA thinks are most at risk of tipping into mortgage stress with multiple rate rises.

APRA believes 280,000 Aussie households are at risk. Picture: Getty Images

Areas in the most mortgage stress

Tasmanians are most likely to be under mortgage stress at 56 per cent of households, while close to 500,000 Victorians are facing the same scenario, DFA found.

Queensland is the only state where less than 40 per cent of households are under mortgage stress across the country.

Nationally, an average of 37 per cent, or almost 274,000 households, were in mortgage stress.

While the Reserve Bank of Australia’s (RBA) previous stance had been to hold interest rates until 2023, data showed that the cost of living had hit a 22-year high, rising to 5.1 per cent from the year to March.

This has left the RBA with little choice but to hike rates multiple times this year, according to experts, with the first rise expected for homeowners in 11 years.

Three major banks are predicting an interest rate rise will hit as early as this Tuesday.

Experts are divided on when interest rates will rise. Picture: NCA NewsWire/David Swift

KPMG senior economist Dr Sarah Hunter said many are tipping the first rate rise on Tuesday but the RBA could still wait.

“There is still good reason for the RBA to wait to June and raise the cash rate by 0.4 per cent in response to the sustained and broad-based increases in prices,” she said.

“A June increase would allow the RBA to act outside the election campaign, and with the benefit of seeing the Wage Price Index release in mid-May before deciding on the size of the upward movement.”

Election issue

In some of Australia’s key swing electorates, a quarter of a million homebuyers in NSW and another 350,000 in Victoria will face their first ever interest rate rise, including marginal seats such as La Trobe and McEwen in Melbourne, alongside Lindsay in Sydney and Pearce in Perth.

Four out of the five electorates with the highest number of households under mortgage stress are held by Labor, the DFA found, including the seat of Brand in WA, Franklin in Tasmania, Hunter in NSW and Hawke in Victoria.

The other electorate is held by the Nationals in the seat of Capricornia in Queensland.

Aussies are being battered with rising prices such as groceries, petrols and bills and now homeowners are nervous about extra costs. Picture: Getty Images

Independent economist Saul Eslake said the huge jump in inflation and the pressure this puts on the Australian economy means the RBA is in a position where its credibility would be at serious risk if it doesn’t raise rates this week.

“If it doesn’t raise rates, [the RBA] leaves itself wide open to the suggestion that the only reason it hasn’t raised rates is because of the imminence of the federal election,” he told The Guardian.

Meanwhile, a slowdown in the property market has began to emerge with prices dropping across the country.