Are you at risk of mortgage stress when rates rise?

Mortgage interest rates are rising at a rapid pace, leaving many Australian homeowners at risk of mortgage stress - if they aren’t already experiencing it.

The Reserve Bank of Australia has hiked the cash rate multiple times from its historic low of 0.10% in April 2022. As the cash rate is a key indicator of home loan interest rates, millions of Australians on variable rate loans have felt the brunt of these rate rises. When homeowners struggle to meet mortgage repayments and maintain a comfortable lifestyle due to the cost of their home loan, this can be a sign of mortgage stress. 

Mortgage stress is commonly defined as when a household is spending 30% or more of its pre-tax income on mortgage repayments. If your home loan lender is passing on the latest cash rate hikes to your mortgage, or if you’re about to come to the end of your lower fixed rate period, you may be at risk of mortgage stress.

Luckily, there are steps you can take if you are at risk of mortgage stress, or already experiencing it.

Calculating if you are at risk of mortgage stress

You can use RateCity’s Mortgage Stress Calculator today to assess whether you are already in mortgage stress, or in a stress ‘danger zone’, based on your income and your mortgage repayments. 

Simply enter:

1. Your pre-tax income
2. Your partner’s pre-tax income (if applicable)
3. Your latest monthly repayment amount (can be found on your mortgage statement)

The calculator will then show you if you are ‘stress free’, in danger of experiencing mortgage stress, or already in mortgage stress.

To know if the latest cash rate hike will put you into mortgage stress, you can crunch the numbers by calculating your monthly repayment with a higher interest rate. Simply:

1. Find your current interest rate (on your mortgage statement)
2. Add +0.25% to your current rate
3. Put this in RateCity’s Mortgage Repayment Calculator

Once you know the monthly payment you’ll make on the higher interest rate, you can put this into the Mortgage Stress calculator to see which zone you now sit in. 

How to beat mortgage stress

Wherever you land on the scale, it’s worthwhile aiming to keep your mortgage repayments below 30% of your pre-tax income to avoid the financial and psychological impacts of mortgage stress. 

This may seem easier said than done, but there are tangible steps homeowners can consider taking that could help put them in front of the latest cash rate hikes. 

Consider your other expenses

While you may not have control over your lender increasing your variable interest rate, there are sure to be plenty of other expenses in your budget that could potentially be reduced.

Start by shopping around for a better offer on your car insurance, gas and electricity, and mobile phone and internet. You may find that new providers will offer competitive prices to incentivise new customers. Also consider what other expenses – such as gym memberships or streaming platform subscriptions – you may not even be using and consider cancelling them altogether.

Remember, small amounts can add up quicker than you may think, easing the pressure of increased mortgage repayments before you know it. 

Negotiate your home loan rate

Lenders often reserve their lowest interest rates for new customers in an effort to get them on their books. Find out what newer customers are being offered, pick up the phone and request your lender matches this rate. Use our helpful guide, including a negotiation script, for this step. 

Refinance your mortgage

It may be worth comparing interest rates other mortgage lenders are offering to new customers, as it could make sense for you to refinance to secure a better deal. If you’ve been paying off your mortgage for some time and built up a buffer of equity, you may be in a competitive position to give yourself a rate cut through refinancing. 

Just make sure you consider any costs associated with making the switch, such as discharge fees, establishment fees and Lenders Mortgage Insurance – if applicable. 

Ask for help

If you find that you are feeling overwhelmed and are unsure what the right move is for you, consider reaching out for help from a professional.

For instance, a mortgage broker may be able to help you compare your existing mortgage with others on the market and make recommendations on suitable refinance options.

If you are experiencing mortgage stress and need help managing your debts, a financial counsellor at the National Debt Helpline could help you get your finances back on track by offering free and confidential counselling services.

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