Reality bites: some borrowers left with as little as $57 a day

People who bought in the last couple of years and borrowed at capacity are set to plunge further into mortgage stress when the eleventh RBA hike hits their bank accounts.

RateCity.com.au analysis shows a single person on the average wage, who took out a new loan two years ago, and borrowed at capacity to do so, will have to shell out 54 per cent of their pre-tax income to meet their mortgage repayments when the May RBA hike takes effect.

After tax is deducted, the person is spending an estimated 71 per cent of their take-home pay on the mortgage, leaving them with just $57 a day for everything else.

That’s $57 for food, electricity, gas, water, internet, phone, clothing, transport, council rates, medicines, health insurance and other essential costs.

This assumes their salary has risen in line with the average wage and that they haven’t re-negotiated their home loan in this time.

Single person

Based on an owner-occupier on the average wage, buying in May 2021

Source: RateCity.com.au. See notes at end.

A family of four who borrowed at capacity two years ago will soon have to shell out 47 per cent of their pre-tax income to meet their soaring mortgage repayments, or 60 per cent of their post-tax income, leaving them with an estimated $125 to pay for essentials beyond the mortgage.

This assumes one parent earns the average wage and the other works part-time at half the wage.

Impact of rising rates on family of four

Based on one parent earning the average wage and the other working part-time at half the wage

Source: RateCity.com.au. See notes at end.

What should people do?

1. Refinance to a lower rate, or if you can’t, ask your bank for a rate cut.
2. Reduce your other bills: don’t stop at the mortgage. Switch to cheaper brands for your phone, energy, internet, insurance – even on your supermarket shop.
3. Re-crunch your budget: go over your expenses line-by-line to see what you can cut. Consider setting a daily allowance to help track what you spend. Money Smart has a free budget planner.
4. Sell big ticket items: look for things you no longer need to sell on the second-hand market. For example, selling a second car could deliver you a cash injection.
5. Boost your income: ask your boss for a pay rise or consider working more hours.
6. Check to see what assistance you are eligible for.
7. Do not: reach for the credit card to plug a hole in your budget. Things are likely to get tighter before they get better. A credit card debt will make this worse.

I’ve tried everything, what next?

If you’ve tried everything, put your hand up and ask for help.

1. Call your bank and ask to be put on their hardship program. The bank will work with you to find a solution. This could include switching to interest-only or part-payments for a period of time.
2. Tell your other providers you are in financial hardship. Many providers will see if you can switch to a cheaper plan or put you on a payment plan.
3. Consider a circuit breaker. Renting out a spare room, moving somewhere cheaper and leasing out your home or selling up are options you may decide to consider.
4. Get independent financial advice. Call the national debt helpline on 1800 007 007.

RateCity.com.au research director, Sally Tindall, said: “Reality will really hit home for many borrowers over the next few months as they try to keep their budgets in the black.”

“The majority of borrowers haven’t yet paid for their tenth RBA hike, but now have got the eleventh lined up right behind it, with the potential of a twelfth looming in the background,” she said.

“Financial stress isn’t just touching low-income households. Some Australians who earn too much to qualify for many of the government concessions are well and truly up against the ropes.

“In particular, many borrowers who stretched the budget to get into the property market in the last couple of years are now buckling under the weight of higher rates.

“To add insult to injury, a lot of these borrowers can’t refinance because they no longer pass the banks’ serviceability tests at higher rates.

“Someone on the average wage who borrowed at capacity two years ago could have as little as $57 a day left over after paying the mortgage. After paying for everyday essentials such as food and transport, but also regular bills such as energy, phone, water and council rates, people are rattling the money box to buy anything else.

“You can barely get halfway around the supermarket on a budget of $57, let alone have money spare to pay the bills.

“While some households are only just starting to make cutbacks, others are a lot further along this journey and are now facing some difficult, life-changing decisions such as selling the house.

“Customers who can’t keep up with their rising mortgage repayments should put up their hand and ask for help before they miss a repayment.

“The bank doesn’t want to take possession of your home any more than you want to hand it over. Instead, it will help you go over your budget with a fine-tooth comb to see what you might be able to pay.

“It’s also important to get some independent financial advice. The National Debt Helpline is a sound place to start as it can put you in touch with a free financial counsellor,” she said.

Notes: the above calculations are based on an owner-occupier paying principal and interest taking out a loan with a 20% deposit with a big four bank in May 2021 and borrowing at capacity. Assumes salaries rise in line with wages growth and that there is 3.75% increase in the year to May 2023. The average wage is the seasonally adjusted ordinary full-time earnings as recorded by the ABS. Tax is based on ATO brackets for each financial year plus the Medicare Levy. Assumes households have private health insurance. Does not include other variations to take-home pay.

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