What Percentage Would Interest Rates Need Rise before You're in Mortgage Stress?

witsa on 04/01/2022 - 20:36
Last edited 04/01/2022 - 21:04 by 1 other user

We all know inflation is going up and there's a good chance interest rates will need to be raised to combat it. The question is when and how high will it go?

The problem is with these low interest rates, we have a ton of new homeowners who are buying in thinking they need to buy a house because "house prices only go up" and "repayments are lower than renting" - without factoring in that when interest rates raise, their repayments will also go up.

So for the mortgage holders out there, how many % would interest rates need to go up before you're in mortgage stress territory?

Poll Options

  • 2
    0.25%
  • 0
    0.5%
  • 1
    1%
  • 4
    2%
  • 66
    5%
  • 5
    I already can't pay my mortgage
Financial Home Loan Loan

Comments

  • Iluvfreebies on 04/01/2022 - 20:36
    +1

    0.01%

  • avoidfullprice on 04/01/2022 - 20:36

    3.5%

  • Mokr on 04/01/2022 - 20:38

    Inflation is already

    Higher costs for foods. Rapid tests. Etc.

    If the stock market doesn't keep going up it will be interesting lots of people went to stocks

  • rektrading on 04/01/2022 - 20:40
    +1

    We all know inflation is going up and there's a good chance interest rates will need to be raised to combat it.

    Why does the cash rate have to go up? Why can't it go down like Japan?

    • ALesha77 on 03/04/2022 - 22:45

      Because:
      1. BOJ owns 50% of all bond market in Japan and it is not a reflection of their true commercial lending rate.
      2. Japan had a positive trade balance at the time they started QE
      3. Japan did not go that massively on fiscal support at the start of QE (but now they did)

      Japan is a basket case with their hard-working and frugal culture much different to our upbringing.
      Hence, if you want a more applicable case to follow, study Argentina or Turkey or pre-nazi Germany.

      In any case, don't you worry, the real estate in Japan folded 70-80% from its high - so this part worked like a clock-work despite the cash rate.

  • garetz on 04/01/2022 - 20:44
    +5

    The inflation isn't being caused by market contractions or expansions, it is being caused by transport logistics problems, so increasing interest rates to combat inflation in this situation is like pissing in the sea hoping to reduce global warming.

    • CommuterPolluter on 06/01/2022 - 01:38

      It’s only that, not the trillions of dollars created over the past two years.

  • Benoffie on 04/01/2022 - 21:17
    +5

    Said 5% but more like 8%.

    We started in the days of 10%. Never dropped the repayments.

    • SBOB on 04/01/2022 - 21:27
      +1

      Good repayment strategy to maintain for those that started on higher rates..
      But, You still have a mortgage from 1995? (That's when rates were last ~10%)

      • SF3 on 04/01/2022 - 21:33
        +1

        According to Vic. https://guides.slv.vic.gov.au/whatitcost/houses

        Houses were affordable back in 1999…

        1999 $131,500
        2006 $299,000

        Now that interest rates are low… looks like a correlation between interest rates and house price, but surely it's more complex then that? :D

    • MrMarket on 05/01/2022 - 10:23
      +1

      Every time banks send me a letter they said you can reduce your repayment as interest has dropped, I increase my repayment by $300 a fortnight
      it happened so often that I am paying triple my original amount

      • Quantumcat on 05/01/2022 - 11:30

        Good for you, yes why would you not want to take the opportunity to pay it off sooner??

        • MrMarket on 05/01/2022 - 12:11
          +1

          got another message today from the banks, so time to increase another $300 , woohoo
          Mortgage free soon at this rate

          Your new minimum repayment amount $811
          Your new minimum repayment amount is payable from 17/01/2022

          • rektrading on 05/01/2022 - 12:29
            -1

            @MrMarket: Why do people choose to pay off their mortgage sooner than required?

            The financial benefit from reducing the interest over 30Y doesn't outweigh the opportunity cost to earn yield from the equity in other markets.

            • MrMarket on 05/01/2022 - 13:13
              +2

              @rektrading: each person has their own strategy and goals, mine strategy is just for me, it not better than your or anyone else

              it just fit my life style and goal, what other do with their money and what strategy they adopted is none of my concern as their circumstances
              and life style are not the same as mine. I have very well defined goals since I was in my early 20s and I carry on till this way and has not waver

              I am tortoise in the world of finance, it slow, it steady but it is solid no financial crisis can rocked its foundation and I been through several market melt down and crisis :-) it just get stronger after each crisis and it will remain this way for the rest of my day.

            • Quantumcat on 05/01/2022 - 13:52

              @rektrading: If you're not investing in anything other than your bank account or buying stuff, then paying off your mortgage asap is the right move. If you're in the share market, or have debts with higher interest rates, or have your own business you need to build maybe not.

  • brendanm on 04/01/2022 - 21:47
    +4

    Your percentages don't go high enough.

  • boomramada on 04/01/2022 - 22:00

    I usually add 3% buffer when calculating the possible repayment on mortgage.

  • Trying2SaveABuck on 04/01/2022 - 22:44

    i'd probably be stressed if it went up more then 1% just bcuz my 'repayments' would be higher, but in terms of financial trouble i hit 5% but the truth it i go enough liquid assets that if it ever got that bad i'd liquidate my other investments and pay it off.

  • TheBilly on 05/01/2022 - 08:19
    +3

    So I just did a quick calculation.

    $800k mortgage at 2.5% is $3,160 per month.

    $800k mortgage at 3.5% is $3,592 per month.

    $800k mortgage at 4.5% is $4,053 per month.

    If rates rise 2% that is a $893 increase in repayments per month.

  • Frozensage on 02/04/2022 - 22:45

    If rates go up 5% pretty sure we b in recession as the most debt is held by the government so in turn everyone suffers. Inflation is wrecking my budget more but means my debt is cheaper than 2 years ago. Hopefully will get more pay rise to offset which makes any small interest rise a non issue

    • ALesha77 on 03/04/2022 - 20:41

      Don't worry about the government - Treasury will issue bonds and RBA will buy it at the "mate's rates".

      Good you are thinking in the right direction about the pay rise however if inflation is sustainably high, most people will not have jobs at all due to high costs of high uncertainty of running a business. Most business owners will be bankrupt by the time RBA decides to act or will just say "f%ck it, it's not worth the trouble".

  • ALesha77 on 03/04/2022 - 20:28

    I think you are doing it wrong.
    Repayments are just a part of the calculations.

    The REAL questions is how high do you think the inflation will need to go for you to still have a job to make the repayments at all? Or to allow your food-energy-health basket to feed your kids and keep their wellbeing at a sustainable level.
    If levels of inflation will hit the expected 8-10% for the next 3-5 years, my wild guess would be that 80% of mortgage-holders will be under water on one side or another.

    Chose your poison.

    • rektrading on 03/04/2022 - 20:45

      If levels of inflation will hit the expected 8-10% for the next 3-5 years,

      Buying hard assets fixes this.

      • ALesha77 on 03/04/2022 - 20:54

        NOPE, if done on borrowed money and bought right now.
        You will become a road-kill twice - one time for the rising cost of re-payments and one more for a negative equity.

        Right now is the perfect time to speculate on commodities and currencies.

        • rektrading on 03/04/2022 - 20:58
          +1

          I'm 99.99% in hard assets. High conviction, high risk with infinite upside.

          Right now is the perfect time to speculate on commodities and currencies.

          I'm not interested in commodities and won't touch fiat money.

          • ALesha77 on 03/04/2022 - 21:20

            @rektrading: Do you mind sharing the list of your "hard assets"?

            I will start - around 70% in shares, rotating between sectors, never "passive", 20% in futures - swing trading (now active in gold and oil), 3-5% still in crypto, rest in cash.

            99.99% in one asset class? I am intrigued.

            • rektrading on 03/04/2022 - 21:27
              +1

              @ALesha77: 😭pto and TSLA.

              • ALesha77 on 04/04/2022 - 22:12

                @rektrading: Funny, well good luck with that.
                I think it is Real-estate of course, and good luck with that well.

                I understand the RE thesis, I really do - dishonest government subsidies, regular FOMO spikes, etc. I just don't like over-leveraged or crowded trades - none of these trades usually ends well for bag-holders, and Australian RE is both.

                • rektrading on 04/04/2022 - 22:38

                  @ALesha77: Luck is for people who pamp their hard-earned money in ETFs or real estate.

                  I prefer asymmetric bets in asset classes with high liquidity, high volatility, and trades 24/7/365. Assets that take the stairs up and cliff dive without a warning.

                  I included TSLA not because I like stonks but because its price action is similar to a 💩coin. It pamped +47% in 15D.

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