Mortgage repayments chomping away at half of household income

Housing affordability has hit a record low, as the proportion of income required to service the average loan climbed to a tick under 50 per cent.

REIA’s latest Housing Affordability Report found that the proportion of median family income required for average loan repayments lifted to 48.6 per cent, an increase of 0.4 percentage points from the previous quarter.

It marked the most challenging position borrowers had found themselves in since the REIA began monitoring this data almost 30 years ago.

Affordability declines were observed across all other states and territories other than modest improvements in Tasmania and Northern Territory, with the Australian Capital Territory experiencing the steepest drop of 1.4 percentage points.

REIA President, Leanne Pilkington, expressed alarm at the growing burden being placed on Australian households.

“The figures underscore the persistent challenges faced by families striving to enter the housing market or manage their existing commitments.

“Rental affordability also saw a decline over the same period, with the proportion of income required to cover median rents increasing to 24.9 per cent. While Victoria and Queensland recorded marginal improvements, New South Wales bore the brunt of the decline, with affordability falling by 1.0 percentage points.”

“Rising mortgage sizes coupled with stagnant variable interest rates continue to push affordability further out of reach.

“Despite the Reserve Bank of Australia maintaining the cash rate at 4.35 per cent and a stable quarterly average standard variable interest rate of 8.8 per cent, the affordability crisis persists.

“The quarterly average three-year fixed interest rate saw a slight decrease of 0.5 percentage points to 6.3 per cent, but this has done little to alleviate the mounting pressures on borrowers.”

Ms Pilkington said that without meaningful policy action, homeownership would remain an increasingly elusive goal for many Australians.

“First-home buyers, often seen as a bellwether for market conditions, faced a mixed scenario, with the number of new loan commitments falling by 3.9 per cent compared to the previous quarter but remaining 9.4 per cent higher year-on-year.

“However, the average loan size for first-home buyers increased to $536,561, representing a 0.8 per cent rise over the quarter and a notable 6.7 per cent jump over the past 12 months,” she said.

Queensland recorded the highest increase in average loan size at 3.0 per cent, while decreases were noted in New South Wales, Tasmania, and the Australian Capital Territory.

No immediate interest rates respite

The RBA appears unlikely to cut interest rates as soon as many would like but there is a glimmer of hope on the horizon for those with budgets at breaking point.

Graham Cooke, Head of Consumer Research at Finder, said it had been a tough year for most Australians.

“The cost-of-living crisis continues to place significant pressure on households.

“Young Australians—particularly those renting, paying off a mortgage, or raising children—are feeling the strain most acutely.

“The good news is that Australians could see a rate cut this financial year, with most experts on our panel expecting the first cut to occur within the first three meetings of next year.”

Adelaide Timbrell, Senior Economist, ANZ, said she expected the first rate cut to be in May.

“With the economy – notably jobs growth and business conditions continuing to show resilience, we are also shifting our view on the quantum of rate cuts and now expect only two, in May and August 2025. That leaves the terminal cash rate at 3.85 per cent,” Ms Timbrell said.

Shane Oliver, Chief Economist and Head of Investment Strategy at AMP, also predicted a rate cut in May but believed the RBA should move earlier.

“With inflation trending down and weaker than expected growth we think the RBA should cut earlier and there is still a high chance of a February cut,” Mr Oliver said.

Thoughts, prayers and financial advice

Despite the trying financial conditions, there were measures and approaches that could be adopted by borrowers struggling to keep their head above water.

Matt Turner, Managing Broker, GSC Finance Solutions, said “if you want to buy property, get in before the rate cut.”

“We are certainly getting a feel from our client base that there will be renewed optimism in the property market once that first cut hits and it will definitely be a mental barrier to bring buyers back to the market.”

Helen Avis, Director of Finance, Specialist Mortgage, said there’s a lot more to a home loan than just the interest rate.

“The features of the loan can also have a big impact on your total mortgage costs and repayment flexibility, which is why it’s important to understand the potential benefits of a redraw facility and an offset account.”

She stressed that there were pros and cons to be considered either way.

A pro is that you can use redraw and offset to reduce your interest bill and pay off your home loan sooner.

Cons are that your lender may charge you a higher ongoing fee or higher interest rate to access these loan features. Also, you may be charged a fee for each redraw transaction.

Mala Raghavan, Associate Professor, University of Tasmania, said households should be acting with caution when it came to spending.

“While the Australian economy may not face a technical recession, growth is expected to slow, leading to a more relaxed labour market.

“In light of this, households might consider adopting a cautious approach to spending, especially on larger purchases.

“Although the cash rate is anticipated to decrease in May, it will only come down by 25 basis points, so, the fall in cash rate is unlikely to significantly relieve the pressure on mortgage holders.

“By being mindful of their financial decisions, households can better navigate the economic landscape ahead.”

Richard Holden, Professor of Economics, UNSW, had more succinct advice for those facing financial stress due to high interest rates.

“Pray.”