Rising interest rates take toll on Aussie financial and mental health: FBAA

Borrowers are just coming to terms with the latest 25-basis-point (bp) increase in the official cash rate following the RBA’s shocking rate decision for May, but data showed borrowers are already struggling to make ends meet. 

Finance Brokers Association of Australia’s (FBAA) latest survey found that 94 per cent of mortgage holders say the rising interest rates and rental prices have put pressure on their financial position and are forced to cancel holidays (30 per cent), sell assets (13 per cent), take on additional work (22 per cent), reduce weekly spending including groceries (61 per cent) and social activities (61 per cent), and withdraw savings (27 per cent) to improve their finances. 

Renters are also doing it tough in the rising rate environment, with 92 per cent pointing to the rate hikes and increasing rental costs as the main culprits for putting them in a tight financial spot.

To improve their financial position, renters said they were also forced to reduce weekly spending including groceries (63 per cent), cut back on leisure and social activities (59 per cent), moved to a cheaper rental property (15 per cent), have taken on more work (25 per cent), opted not to push through with their holiday plans (36 per cent), withdrawn funds from savings accounts 21 per cent) and sold assets including cars (19 per cent).

Peter White AM, managing director of the FBAA, said a similar survey conducted by the finance and mortgage broker body in 2021 — six months before the first rate hike — predicted the startling findings. 

At the time, the FBAA warned, “Many Australians are clearly on the brink and are sleepwalking into disaster, living in the false hope that rates will stay this low.”

Mr White argued that while governments and lenders “knew this was coming” due to prevailing global indicators, there was “a failure to prepare Australians” who grew complacent after more than a decade without experiencing any increases in interest rates. 

“We are sadly now seeing the results,” he added. 

He warned that more pain was to come with potential future rate increases and that many borrowers on low fixed rates still had to convert to much higher payments.

Alarmingly, the Australian mortgage and rental affordability survey, which was conducted by research firm McCrindle, also found that in addition to financial challenges, the personal, social, and mental impacts of surging interest rates on borrowers and renters were just as significant. 

The figures reveal that 50 per cent of those with a mortgage have experienced greater stress while more than a quarter report tension in their relationship with their partner or spouse. 

Findings further showed almost half of those surveyed feel uncertain about the future and there has been a significant increase in the percentage of people seeking mental health help from a psychologist, therapist or counsellor, as a direct impact of rising rates and rental prices.

Mr White said that these findings show that Australia is facing both a “financial and mental health emergency”

“It will take a combined approach by [the] government, lenders and the community at large to help people through this,” he remarked. 

The expert said while there is oversight from authorities on how the rate hikes will impact Australians, there are things the government, regulators, and RBA can do to assist people now. 

“We understand the need to raise rates to achieve economic and inflationary goals; however, after such a large increase over a short period of time, it must be time to balance these goals with the economic and social impact future rises would bring. I hope the RBA will ease off and allow Australians time to recover,” he said. 

He also called on the Australian Prudential Regulation Authority (APRA) to reassess its decision to continue with a 3 per cent loan serviceability buffer for mortgages, as interest rates rise.

“The current serviceability buffer makes it harder for mortgage holders to refinance and negotiate a better rate. The buffer, which is added to a lender’s interest rate for loan assessment purposes, means that many borrowers who can afford the interest rate of the day or even a little higher, are being unfairly prevented from refinancing,” he commented. 

Mr White cautioned more borrowers are becoming “mortgage prisoners” who are “locked into a situation where they can’t access a better deal because they don’t meet the inflated assessment rate.” 

“A 3 per cent buffer was appropriate in the past because interest rates were at an all-time low and were always going to rise significantly, and this protected both the banks and the borrowers, but we can’t live in the past and a buffer of 1.5 to 2 per cent is far more appropriate today and in the near future,” he stated. 

In order for borrowers to have some reprieve, Mr White also called on the banks to “do the right thing”, stating it is “imperative that banks do not increase their rates outside of increases in the costs of funds”. 

“From past experience, we know that some banks will look to use these opportunities to maximise their profits at the expense of mortgage holders. If banks raise consumer lending rates higher than they need to, it will backfire and create a greater problem.” 

As for borrowers, he urged people to look ahead and seek assistance “before the lender comes knocking and you are forced to.”

“Call your bank, mortgage broker or landlord the moment you are concerned that you may not be able to handle the increased payments. Lenders can often help and mortgage brokers have many options,” he said. 

Mr White’s final advice was to acknowledge and consider the impact of financial stress on one’s mental health and not to overlook its effects. “And if you feel that you can’t handle the pressure, please seek help from a health professional. This is a time to look after one another,” he concluded.