Aussies to be left with just $57 a day: ‘Reality bites’
If you’re experiencing mortgage stress, here are some tips to help.
Aussies who purchased a home in the past couple of years could be in for a rude shock once the Reserve Bank’s (RBA) May interest rate hike takes effect.
RateCity.com.au analysis found a single person on the average wage, who took out a new loan two years ago, and borrowed at capacity to do so, would 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, that person would be spending an estimated 71 per cent of their take-home pay on their mortgage, leaving them with just $57 a day for everything else.
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That’s $57 for food, electricity, gas, water, internet, phone, clothing, transport, council rates, medicines, health insurance and other essential costs.
The calculations also assumed their salary had risen in line with the average wage and that they hadn’t renegotiated their home loan.
A family of four who borrowed at capacity two years ago would 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 earned the average wage and the other worked part-time at half the wage.
“Reality will really hit home for many borrowers over the next few months as they try to keep their budgets in the black,” RateCity research director Sally Tindall said.
“The majority of borrowers haven’t yet paid for their 10th RBA hike, but now have got the 11th lined up right behind it, with the potential of a 12th looming in the background.”
Tindall said financial stress was not just touching low-income households, with many Aussies “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,” she said.
“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.”
Where is the money going?
Impact of rising rates on a single person:
May-21 | May-23 | Difference | ||
Income | $90,329 | $95,481 | +$5,152 | |
Interest rate | 2.69% | 6.44% | +3.75% | |
Loan size | $688,900 | $662,323 | -$26,577 | |
Monthly repayments | $2,791 | $4,264 | +$1,474 | |
% of pre-tax income on mortgage repayments | 37% | 54% | 17% | |
% of post-tax income on mortgage repayments | 49% | 71% | 22% | |
Daily budget (after mortgage and tax) | $96 | $57 | -$39 |
Impact of rising rates on family of four:
May-21 | May-23 | Difference | ||
Income | $135,494 | $143,221 | +$7,727 | |
Interest rate | 2.69% | 6.44% | +3.75% | |
Loan size | $907,700 | $872,682 | -$35,018 | |
Monthly repayments | $3,677 | $5,619 | +$1,942 | |
% of pre-tax income on mortgage repayments | 33% | 47% | 15% | |
% of post-tax income on mortgage repayments | 41% | 60% | 19% | |
Daily budget (after mortgage and tax) | $174 | $125 | -$50 |
What should people do?
Refinance to a lower rate or, if you can’t, ask your bank for a rate cut.
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.
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.
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.
Boost your income: Ask your boss for a pay rise or consider working more hours.
Check to see what assistance you are eligible for.
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:
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.
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.
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.
Get independent financial advice. Call the national debt helpline on 1800 007 007.
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