Wages stagnation leaves consumers vulnerable to interest rate rises: Patrick Marion

GUEST OBSERVER

The move by the big four banks to raise rates above the Reserve Bank is set to put mortgage holders in a world of hurt with research showing over a third of consumers are unprepared to make higher home loan payments given the interest rate hike. 

Research from Citiwide Homeloans revealed 35 percent of consumers admitted that not only have they not budgeted for an interest rate rise, such an increase would negatively impact their household. 

This would be enough of a concern in itself in terms of consumers potentially defaulting on their home loans, but when allied to other survey findings that average wages are stagnating and a large proportion of consumers are paying scant attention to budgeting or saving, it paints a worrying picture. 

Although rates were at historic lows, consumers should be keeping a tighter rein on their household budgets to ensure that they are not left in a financial pickle with the markets shifting again. 

Our research found that a third of respondents have gone two years or more since their last pay increase, and three quarters reported pay increases fell into the 1-3 percent range, which has minimal impact on a household’s disposable income. 

This is creating an environment where less money is being set aside for savings, with over 40 percent of the survey participants saving less than 5 percent of their total income, and 15 percent admitting that they save nothing at all.

Our findings clearly indicate that not enough attention is being paid to household budgeting, which in wake of rates moving up again could leave a lot of households in considerable financial strife.

With almost 40 percent of respondents admitting that they did not organise their finances based on a set household budget, it is clear that the importance of budgeting and saving at all times is being lost on consumers, or is simply being ignored.

On the flip side though, almost 70 percent of those we questioned said their home loan repayments made up 30 percent or less of their total household income, so that still leaves a fair proportion of household budgets which could be saved or placed in a mortgage offset account to reduce interest, once the other household expenses are taken care of.

It is imperative that people address this now while they still have some wiggle room, rather than waiting until they get into financial difficulties.

Patrick Marion is chief executive officer of Citiwide Homeloans