Compared to other countries, Australians are hit harder by rising interest rate changes. Why? There are three reasons: higher household debt; higher share of variable rate mortgages; and a large share of fixed rate mortgages that are about to expire.

Why is Australia more sensitive to interest rate changes?  Australians love their houses. In fact, you might go as far as to say that Australians are obsessed with their homes and with home ownership in general. For the better part of a century, when anyone talked about ‘the Australian dream’ they really meant the dream of owning their own home. And a poll by Australian National University found that more than three quarters of Australians still believe that.

But with the rising interest rates Australians are doing it harder than ever – and harder than most other countries. And part of that is because of this obsession with home ownership.

Why is Australia more sensitive to interest rate changes?

The whole world is feeling the pinch right now. Rising interest rates and soaring inflation is striking the UK, the US, New Zealand and, of course, Australia, among most other countries worldwide. But Australians feel interest rate changes more. In other words, interest rate changes have more of an impact on us than any of our overseas counterparts.

And this comes down to three reasons:

1. High levels of household debt
2. High share of variable rate mortgages
3. Large share of fixed rate mortgages that are about to expire

High Levels of Household Debt

Our obsession with home ownership means that we are a nation of home buyers. And that means that we are carrying a lot more household debt than others overseas. In fact, in Australia the average household debt is 187% of the householder’s income. On the other hand, in New Zealand for example, the number is closer to 122%.

Even with our nearly 100 years of home owning obsession, we’re at an all-time time high with our average household debt. And this higher debt means that we feel interest rate changes more acutely. That 1% increase on a smaller loan simply won’t’ be felt in the same way as a 1% increase on a much larger loan amount.

High Share of Variable Rate Mortgages

In Australia we also have – historically – been more prone to seeking out variable rate mortgages and financing, with 85-90% taking that option. This makes sense when interest rates were at a very low, borrower-friendly level. But when interest rate changes are heading up – a position we’re currently in after hikes to the national cash rate for six consecutive months – mortgage holders will see that reflected in their monthly repayment amounts. And this can severely impact their ability to live the lifestyle they’re used to.

Large Share of Ready-to-Expire Fixed Rate Mortgages

Some savvy homeowners saw the low interest rates of the previous three years – including a record low of 0.10% in November of 2020 – and locked that in with a fixed rate mortgage. This helped them take advantage of record low mortgage rates.

But while a fixed rate mortgage loan is great news in a rising rate market, most fixed rate mortgages are only for a fixed term. And now many of those fixed rate mortgages are ready to revert to variable rate making them vulnerable to these higher rates.

The problem here is that these borrowers may not be able to service the reverted variable rate loans. The RBA estimates that 38% of Australian households with a mortgage will see a rise in repayments by 40% or more if interest rates rise 300 basis points. And this will impact 1.3 million households. This is a huge rise in housing costs for a significant percentage of Australians. An impact that will be felt keenly.

How to Manage Interest Rate Changes

If you’re struggling under rising interest rates there are a few things that you can do. First, consider negotiating a lower interest rate on your home. Shop around to see what’s on offer or contact your current lender to ask for their new borrower rates.

Second, work to get yourself home loan ready. Take steps to pay off any credit card debt, lower your monthly spending and increase your savings. While you might have to tighten your belt for a few months, this will pay off in the long run when you have lower debt.

Third, consider refinancing. This is something you should investigate at least annually to ensure that you’re always on the best rate for your situation. And a little bit of work now could ensure that you feel the pinch a lot less than many other Australians.

Enlist the Help of An Expert

If you’re feeling the impact of higher interest rate changes on your home loan or want to understand your refinancing options, get in touch. We’re ready to help you get the best interest rates available and ensure you’re able to ride out the difficult economic situation as well as possible.

Give us a call today at Lending Loop, and let’s see how we can help!