At a time when many Tasmanian households are already experiencing mortgage stress, Australia's interest rates are predicted to rise by more than three per cent by 2023, likely leaving more homeowners struggling to meet repayments.
Latest data analysis from Digital Financial Analysis (DFA) found that Launceston, including its suburbs of Riverside, Trevallyn, Newstead, Ravenswood and St Leonards, is ranked six in Australia for experiencing mortgage stress.
This stress occurs when households are paying more than 30 per cent of their income on mortgage repayments, and is exacerbated by an increase in non-discretionary spending items, such as food, fuel, rates and fees.
If this [cash] rate rises in quick succession it is going to have a fairly big impact on anyone with a mortgage, particularly those with large mortgages- Economics expert Paul Blacklow
Financial analyst Martin North, of Digital Financial Analytics, said almost all of the households with a mortgage in the Launceston area were experiencing such stress.
He said this was due to rising property prices and loans, occurring at a when household incomes were not increasing.
"There are particular pockets [in Australia] where households are in significant difficulty. A lot of them are in high growth corridors, where there is a lot of building going on, or where a lot of people have bought recently off the plan," Mr North said.
"First home buyers or recent migrants, with large mortgages and frankly, with fragile incomes."
Tasmanian economist says 'prepare now' for $100, $200 weekly rate rises
To avoid further stress, Economic Society of Australia state president Paul Blacklow said mortgage holders should prepare for interest rates to rise by two per cent, and ultimately plan for them to rise by three per cent by the end of 2023.
His advice comes at a time when the Commonwealth Bank of Australia predicts a cash rate rise of 1.25 per cent by early next year, up from the .1 per cent cash rate currently set by the Reserve Bank of Australia.
Dr Blacklow said a variable interest rate of three per cent could easily rise to six per cent, resulting in a substantially higher payment that is 36 per cent more than what it used to be.
For example, Dr Blacklow said a person with a $300,000 loan on which interest rose from three to six per cent would require an extra $117 per week, for a total payment of $444 per week.
At the same time a person with a $500,000 loan would be paying $200 extra a week for a total payment of $741 a week.
"Everyone needs to be ready for the interest rates to go up by two to three per cent in a years time. It doesn't hurt to start acting now, to put money away, or to increase your variable rate, or to slowly increase your payments now so you don't have to in the future," Dr Blacklow said.
"If this [cash] rate rises in quick succession it is going to have a fairly big impact on anyone with a mortgage, particularly those with large mortgages," he said.
"Property prices are high at the moment, so I would imagine a lot of new home owners are going out a long way, taking out $500,000 mortgages, or more, in order to purchase a new home."
Difficulty making repayments
In October last year the Australian Prudential Regulation Authority (APRA) increased the amount by which banks must assess a borrowers ability to repay loans.
It found that banks must assess whether a new mortgage holder has the ability to pay loan repayments with an interest of at least 3 per cent, which was up from the standard 2.5 per cent assessment rate.
The direction came after it found that 20 per cent of new borrowers were loaned more than 6 times their income, or one in five borrowers were arguably getting into debt beyond their means.
TG Financial Planner Tony Gray said in these types of loans there was not much scope to handle rising interest rates, especially when taxes and cost of living costs were rising.
"There will be some people that for many individual reasons can't meet loan repayments. They might have reduced work or are unable to work, they might have lost their job, have ill health, or it might be a marriage separation," Mr Gray said.
"If you are unemployed and have a loan on a house where interest rates have gone up, you might be in trouble," he said.
"But it is not just rising interest rates that are causing issues. Non discretionary spending is going up, and if they also have to spend more on mortgage repayments, then what is left over is shrinking. Which means, for some people, dipping into buffers, and if they don't have a buffer, they will start moving into arrears."
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