Homeowners to suffer under increased debt burden

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Homeowners that capitalised on record low interest rates and lifted their debt commitments are set to experience increased financial hardship in the months ahead, a new survey has found.

More than 75 per cent of homeowners added to their mortgage or took on other forms of debt when interest rates were sitting at their 49-year low, according to a poll by Loan Market Group.

A significant 44 per cent of homeowners increased their home loan while only 23 per cent did not take on any more credit.

Loan Market Group’s chief operating officer Dean Rushton said the increased debt burdens could really hurt Australians now given the fact that the RBA was gradually starting to raise rates.

"Hundreds of thousands of Australians are in greater debt than they were a year ago so any increase in interest rates will hurt,” Mr Rushton said.

Loan Planners’ Ken Bruns told Real Estate Business that while some borrowers may struggle under higher interest rates, most brokers would have warned their customers about potential rate increases and should have worked out their borrowing capacity with the rising rate environment in mind.

“The Reserve Bank wants to see retail rates sitting at approximately 7.5 to 8 per cent. With this in mind, I recommend to all my customers that they pay their mortgage off as though interest rates were already at this level.

“In this respect they are able to pay more off their mortgage when rates are low and have a buffer stopping them from feeling any pain when interest rates rise,” Mr Bruns said.

“Some borrowers will always struggle because interest rates are going up rather than down. That said, if a borrower is struggling now with rates around 6 per cent, they have been led astray by their financial manager.”

Earlier this week, the central bank raised the cash rate for a second month in a row, lifting the cash to 3.5 per cent and there is speculation the Bank may raise rates again in December, taking the official cash rate to 3.75 per cent before year’s end.

 

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