In the wake of Covid-19, inflation has hit a generational high. As of February 2023, some nine in ten Australians cite cost of living as one of the most concerning global issues, ahead of healthcare availability, climate change and Covid-19. And three-quarters of Australians claim that they have been negatively impacted by cost of living pressures.
One group particularly impacted are mortgage holders. Steady increases in interest rates have made mortgage repayments more expensive for homeowners. Over the past 12 months, the average monthly mortgage repayment has increased by 37%, equivalent to about $900 a month. And the issue for many is that wage growth has not matched this increase. In fact, in the 12 months to December 2022 average monthly earnings increased by just 3.3% ten times less than the increase in average monthly mortgage repayments during the same period.
As a result, mortgage holders are spending more of their income on servicing their home loan than they were just one year ago – now spending an average of 42% of their income on their mortgage. This seriously impacts the amount left for essentials such as groceries and bills.
And the situation is not likely to improve in the foreseeable future. The Reserve Bank of Australia estimates that up to 800,000 fixed loan contracts will end in 2023, with these customers moving onto higher variable rates. Some economists are predicting the economy will take a serious hit when people come off these fixed rate loans.
As a result, more than half of mortgage holders are now worried about paying off their mortgage and are considering refinancing at historically high levels. Over the 6 months to February, more than 200,000 homeowners have refinanced – increasingly looking to other banks rather than their own provider. One-third of mortgage holders are planning on refinancing their home loan in the near future, and this proportion is even higher amongst those under mortgage stress.
And it’s not just refinancing that’s on the cards – mortgage holders are increasingly looking to reduce their borrowing behaviour (including payday lending and BNPL) and cancel credit cards.
They are also cutting back on everyday spending. Four in five are shopping for specials or buying in bulk, with a similar number eating out less and buying fewer non-essential items. But there may be bigger shifts to come as homeowners battle increasing mortgage payments. Around one-third are looking at switching insurance policies or considering changing energy or telco plans. One in five are cancelling or changing travel plans. And entertainment streaming subscriptions and memberships are being re-evaluated as mortgage holders struggle to make ends meet.
Many mortgage holders are also taking proactive steps to help navigate the challenging times ahead. Two-thirds of mortgage holders are currently following a planned budget, with another 22% planning to do so. And more than half of all mortgage holders have automated their savings or plan to do so.
Despite continuing inflationary pressures and a rising cost of living, the RBA surprised many economists by resuming interest rate rises in early May after a one-off pause in April. It has lifted its cash rate target from 3.6 to 3.85 per cent, marking the 11th increase in the space of a year. The cash rate is now at its highest level since it was cut to 3.75 per cent in May 2012.
There is no doubt that there are tough times ahead for many Australians. Financial wellbeing and the rising cost of living have Australians worried. Between August and January 2023, Lifeline saw a 49% increase in referral searches for financial issues and homelessness. While the financial impact has been significant, the greatest cost might yet be to mental health.
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