Sydney, Australia – Maryam Zafar, a software engineer living with her partner and two young children in western Sydney, is worried that higher mortgage repayments could soon force her family to cut costs.
After Zafar migrated from Pakistan six years ago with the dream of owning a home in Australia, Zafar and her partner came to the real estate ladder in December 2020.
The couple currently pay 3,200 Australian dollars ($ 2,359) each month in mortgage payments, along with expenses ranging from groceries and petrol to their daughter’s cricket club fees.
“When we bought [the property]was the interest rate at a minimum, so we thought it would be a good time to buy, ”Zafar, 39, told Al Jazeera, recalling that Australia’s central bank a month before buying the property raised its benchmark interest rate. to 0.1. percent to boost the economy during the pandemic.
At the time of purchase, the couple estimated that they could pay off their mortgage in less than a decade without cutting back on other expenses.
But while Australia’s central bank wants to raise interest rates to curb rising inflation, the Zafar family and millions of other borrowers across Australia are preparing for higher payments in the months and years ahead.
The Reserve Bank of Australia opened the door earlier this month to raise its benchmark interest rate, currently at 0.1 per cent, for the first time since 2010, after previously promising to be “patient” about the stricter policy. A higher interest rate – the interest rate charged on loans between banks – typically leads to higher borrowing costs for mortgage holders and other lenders.
RateCity, a financial comparison site, has calculated that a homeowner with a $ 500,000, 25-year mortgage that pays the lowest variable interest rate may have to pay $ 500 more each month by the end of 2023 due to higher interest rates.
In a survey conducted last year by the Finance Brokers Association of Australia, more than half of respondents said they would not be able to keep up with payments if rates rose by 1 per cent, by 56 per cent. percent who said they would have to look at refinancing their home.
Angel Zhong, an associate professor of finance at RMIT University, said many recent first-home buyers and young families may struggle to adjust their budgets after planning their personal finances around ultra-low interest rates.
“The implication is that the interest rate will rise, but people’s cost of living has also risen. However, their wages did not increase, “Zhong told Al Jazeera.
Although relatively modest, Australia’s inflation of 3.5 per cent exceeded wages in 2021, growing by just 2.3 per cent.
Shravan Nagesh, a 29-year-old pilot and transport business owner, bought a property in Sydney in August 2020 as his future family home, and is currently renting the property to generate passive income.
After facing record petrol prices that put pressure on his business, Nagesh is now worried about the prospect of higher interest rates.
“Whatever I receive through the lease will go in full for the repayment of the mortgage, and I will not have that passive income from that property,” Nagesh told Al Jazeera.
Nagesh currently pays $ 1,578 a month on his mortgage, but has been informed by his bank and his accountant that he may pay an extra $ 900 depending on how high interest rates rise.
“At the moment, everyone understands well that interest rates are going to rise, but the concern for me is the uncertainty behind it,” he said. “I’m basically worried about when it’s going to rise, by how much it’s going to rise and for how long? ‘
Australia is among the top five countries with the highest levels of household debt, with the average household owing the equivalent of 203 per cent of net disposable income, according to OECD data.
Nicolas Herault, an associate professor of economics at the University of Melbourne, said ultra-low interest rates in recent years and relatively flexible lending practices have encouraged Australians to buy rather than rent.
Before the benchmark interest rate fell close to zero in 2020, Australia’s interest rate went as high as 4.75 per cent in 2010.
Ahead of a federal election on May 9, Australia’s political parties have made several promises to tackle rising costs that also include years of rising house prices. In its most recent budget, the incumbent Liberal-National government announced fuel tax cuts to reduce growing financial pressures on households, as well as expanding a scheme that allows first-time buyers to pay up to 95 percent of the cost of a property without mortgage insurance need to buy.
For mortgage holders, however, it looks like financial pressure will increase.
Australia’s leading banks are all predicting several rate hikes this year to take the key rate to 1 per cent or more, while financial markets have priced a benchmark rate of 1.75 per cent by the end of the year and 3 per cent by late 2023.
Earlier this month, the Reserve Bank warned that property prices could fall as much as 15 percent if rates rise in line with market expectations – causing many borrowers to owe more money than their property is worth.
Zhong, the RMIT university professor, said gradually raising rates will help mortgage holders adjust to the higher costs.
“Raising interest rates is essential if we are to control inflation,” she said. “But perhaps this increase in interest rates should be implemented gradually.”