$3,156 a year: Mortgage holders will struggle without a pay rise

Without a salary bump, mortgage repayments could become a burden for many households. (Source: Getty)

If wage growth remains stagnant, rising interest rates could see household budgets under pressure as mortgage holders will need to cough up thousands extra each year.

The Reserve Bank of Australia is expected to increase the official interest rate to curb inflation as early as June, mortgage holders will need more money to service their home loans.

A minor interest rate rise will “hardly register as a blip in the family budget” provided those households receive a modest pay rise, according to a new report from comparison website Savvy.

• Also read: RBA keeps rates on hold: Mortgage holders fear future hike

• Also read: ‘Need a buffer’: RBA’s warning to 1.1 million Aussies

• Also read: What happens to rents when interest rates rise?

But if wages remain untouched, a 1 per cent rise could mean paying an extra $3,156 on your mortgage each year.

“That is more easily said than done for many Australians,” the report stated.

Let’s break that down

These estimates were based on a household with a combined average income of $135,720 (the average wage in Australia multiplied by two) borrowing $500,000 over a 25-year loan term with a variable interest rate of 2.7 per cent (the average as of December 2021).

Under this scenario, the household’s monthly repayments would be about $2,294.

So how would this household cope with the incoming interest rate hike?

If their wages go up, even modestly, the increased repayments “could be absorbed with little effort”.

Just a 2.3 per cent pay rise would see the average family, described above, pocket an additional $3,121 a year.

Thanks to this pay boost, the family would only need to find an extra $35 per year to service their mortgage.

But without a pay rise, things would look very different.

Under this scenario, a 1 per cent interest rate rise could mean paying an additional $3,156 on their mortgage per year.

“If the same family loses a significant amount of work hours, or is suddenly on a single income due to a shock job loss, this would immediately place them in mortgage stress – a situation where a household spends more than 30 per cent of their earnings on servicing a mortgage,” the report stated.

How much extra the average household will pay each year without a pay rise. Source: Savvy

However, Bill Tsouvalas, Savvy managing director & home finance expert, said with unemployment at near-record lows - 4 per cent - this “should push wages higher, especially in services where employers are scrambling to fill positions”.

He added that mortgage stress was at record-low levels due to “numerous government interventions, such as extended payment holidays, JobKeeper/JobSeeker, COVID disaster payments, and so on”.

“With record levels of government debt on the books now, the Government – and whatever that government might be after the May 21 election – will be reluctant to bail out homeowners in view of creating even more inflation,” Tsouvalas said.

He told homeowners to act quickly if they hadn’t already fixed their rates.

“Refinancing at a lower rate is also better to start sooner rather than later,” he said.

“Because with all indicators pointing to rising inflation, rates will definitely start shifting upwards."

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