Suburbs where homeowners are most vulnerable to rising interest rates

Homeowners in affordable, family-friendly suburbs may be the cohort most affected by the Reserve Bank of Australia’s recent interest rate rises, new data suggests.

That’s because a high number of recent buyers – who haven’t had the chance to build up home equity or mortgage buffers – purchased homes in suburbs offering house-and-land packages, affordable apartments, or a family-friendly lifestyle.

New PropTrack data has revealed where most households purchased in the 12 months to April 2022, how much they paid, and how much extra the RBA rate hikes could cost them each month, assuming each rate hike is passed on in full.

Since May, the RBA has raised the official cash rate by 125 basis points, taking it from 0.1% to 1.35%.

While buyers with a larger mortgage size will see the biggest increase to their home loan repayments, PropTrack economist Angus Moore said this wasn’t necessarily the best way to gauge the impact on households.

“The suburbs that have seen the biggest increase in monthly repayments, it’s places like Point Piper, Palm Beach, Longueville, that all have suburb medians in excess of five or six million dollars,” Mr Moore said.

“So if you bought with an 80% loan-to-value ratio in one of these suburbs you’re going to see a $3,000 increase in your mortgage payments in the last three months.

“That said, somebody buying a $6 million house probably has the means to spend an extra $3,000 in monthly mortgage repayments”

He said instead looking at the suburbs with the most sales over the past 12 months better represented where homeowners would be more vulnerable to rising interest rates.

“Ranking it this way, gives us a sense of suburbs where there are a lot of recent buyers,” Mr Moore explained.

“So, in contrast to looking at Point Piper where there are not very many people buying six-million-dollar homes, there are a lot of people buying half-a-million-dollar homes in Surfers Paradise.”

The potential cost to recent buyers has been calculated using the median sale price of properties in each suburb, assuming a borrower had saved a 20% deposit, on top of other upfront costs like stamp duty.

However, given surging house prices have made saving a 20% deposit even harder over the past year, more borrowers have opted to take on lenders mortgage insurance (LMI) to get into the market sooner. As a result, some households would have even larger mortgages than estimated in this analysis.

Affordable suburbs dominate top ten list

When looking at the suburbs with the highest number of recent buyers, Mr Moore said generally speaking, they could be characterised as larger, more affordable suburbs with lots of housing construction or apartments.

With a median sale price of $520,000, Surfers Paradise on the Queensland Gold Coast recorded the highest number of house and unit sales over the past year.

Assuming a borrower had saved a 20% deposit, on top of other upfront costs, they’d have a mortgage size of $416,000 – costing around $1,650 in monthly loan repayments before the RBA’s first interest rate hike in May.

But factoring in the combined hikes of 125 basis points, borrowers now need to find an additional $280 each month.

In this calculation, the borrower is an owner occupier paying principal and interest with 30 years remaining on their loan. It assumes an average interest rate of 2.52% according to April RBA figures. The calculation does not factor in loan fees and charges, or any principal paid down over time.

Neighbouring Southport also made the top ten list, which Mr Moore said reflected strong buyer demand for the Gold Coast in recent years.

“Suburbs in the Gold Coast have been really popular in the last couple of years. We’ve seen net migration from Sydney and Melbourne to southeast Queensland and that’s reflected here,” Mr Moore said.

“For those people who have bought recently, they could see a just-under $300 increase in monthly repayments. There are a lot of people in that bucket.”

The two Gold Coast suburbs recorded more than 3,500 property sales between them over the past 12 months.

However the bulk of the sales were located across Greater Melbourne – with six of the top ten selling suburbs located in the Victorian capital.

Mr Moore said large development suburbs with house-and-land estates had attracted thousands of recent buyers.

“Melbourne’s unique in that a lot of apartment development happens right inner-city Melbourne, and so we have a lot of recent buyers there,” Mr Moore said.

“That said, suburbs like Pakenham, Craigieburn and Tarneit are all big housing development areas and Melbourne, to its credit, is a very active building city.

“It has accommodated it’s growing population in a way that some other cities haven’t done as well, and has built a lot of homes in the past five years.”

With a median sale price of $730,000, recent buyers in Melbourne’s Point Cook face an additional $400 in monthly loan repayments based on the RBA’s rate hikes so far.

Buyers in Pakenham and Craigieburn, where the median sale price was $620,000 and $630,000 respectively, face an additional $340 a month if they’d put down a 20% deposit.

The development suburb of Baldavis in Perth’s southeast also made the top ten list, with 1,246 property sales over the year.

Had a borrower put down a 20% deposit on a median priced home of $440,000, the rate hikes so far would add an extra $240 to their loan repayments each month.

In New South Wales, the coastal town of Port Macquarie recorded the highest number of property sales over the past year.  

“When we look at New South Wales there’s actually quite a lot of regional suburbs, places like Dubbo, Orange, Port Macquarie,” Mr Moore said.

“These are large suburbs, so they covers a lot of geography but it’s also consistent with the fact that we have seen a lot of people moving to regional areas, particularly regional NSW over the pandemic period.

“So we might have quite a lot of new homeowners in those areas who are now seeing their mortgage rates rise by as much as $300 to $400 each month.”

In Sydney, 50% of the top ten most popular suburbs had a median sale price of more than $1 million.

Recent buyers in popular family suburbs like Castle Hill and Baulkham Hills are already facing an extra $850-$1040 a month based on the median sale price over the past 12 months, with interest rates only tipped to rise further.

“It certainly is a sizeable hit given how relatively expensive housing is in Sydney, recent borrowers are facing quite a steep increase in repayment,” Mr Moore said.

“So we would expect to see that start to have some impact [on spending] later this year as those higher repayments flow through the borrowers.”

Current rate rises only the beginning

The RBA has acknowledged the latest interest rate hikes are already putting pressure on some households at a time when other living costs are rising.

But with annual inflation tipped to reach more than 7% by the end of the year, the RBA has signalled further rate hikes are on the way, which means repayments would increase even more.

Addressing a business forum in Melbourne on Wednesday, RBA governor Philip Lowe said the situation was complex.

“Household spending has so far been resilient, supported by household balance sheets that are generally in good shape and stronger income growth,” Mr Lowe said.

“But as my colleague, Michele Bullock, discussed yesterday, not all households are alike. Recent borrowers and borrowers with lower incomes tend to have smaller buffers.”

Forecasts on how high interest rates will reach vary between economists, however all major banks expect the cash rate to end 2022 at least one percentage point higher.

ANZ economists see the cash rate climbing another 2 percentage points to 3.35% by November, following stronger-than-expected employment data.

Speaking about the decision at a MFAA mortgage broking event on Tuesday, ANZ senior economist Felicity Emmett said the prospect of much higher mortgage repayments is weighing on consumer confidence.

“This is going to be quite challenging for anyone who’s recently taken out a relatively large mortgage,” Ms Emmett said.

These borrowers also face the double-whammy hit of falling home values, Mr Moore said.

“For someone who bought quite recently, we are likely to see prices decline through most of this year, and probably into next year, given the pace that the RBA is raising rates,” Mr Moore explained.

“And that will mean that some people will see their equity decline, at the same time as having to pay more on their mortgage.”

He said borrowers, particularly those who stretched themselves to get into the nation’s most expensive housing market were now facing a steep rise in costs.

“Median homes in Sydney are more than a million dollars on average so interest rate rises have a big impact,” Mr Moore said.

Based on ANZ’s cash rate projections, a borrowers with a million dollar home loan could see their monthly repayments surge by more than $1,800 a month since May.

ANZ forecast for 3.35% cash rate by end-2022

How to combat rising interest rates

Sydney-based mortgage broker Leanne Johnstone told realestate.com.au home loan complacency was potentially costing borrowers thousands of dollars a year.

“I did a recent comparison and on average over the last 12 months most of the clients I’ve refinanced have saved in excess of $2,500 annually in interest alone,” Ms Johnstone said.

She said the shift away from pandemic-era ultra-low mortgage rates was reflective of more normal market conditions.

“I don’t believe that this is short-term, I’ve been doing this for 20 years I’ve never seen rates as low as what they were.

“I think people need to see this as being the new norm, not only the current rates but also increased rates.”

Despite the higher costs, Ms Johnstone said many borrowers can still save thousands of dollars by switching to a different lender.

“Part of that has to do with the fact that most lenders are actually offering better rates to new customers than what they do for existing customers,” Ms Johnstone said.

“Plus, when you refinance there’s many lenders now offering refinance rebates which can be thousands of dollars, and I mean up to $4000, $5000 when you refinance.”

“In an increasing interest rate environment it really is the time to get your house in order, to look at expenses, to look at what interest rates you’re currently paying and say, what can I save on?”