How big a pay rise you need to afford to buy a house

Home hunters would need a pay rise of as much as $28,000 since April to afford a median-priced house even though property prices are falling, because mortgage repayments are more expensive now, new modelling shows.

If a potential home buyer does not manage to purchase until March 2023 and interest rates rise as forecast, they would need to earn an extra $9000 by then.

Even though house prices have been falling, a quick succession of interest rate rises, taking the cash rate to 2.6 per cent in October, means repayments are bigger.

As interest rates rise, it’s predicted buyers will need thousands more to be able to comfortably repay their mortgage.

In Sydney, someone hoping to buy the median house for $1,283,502, would have to earn about $28,000 more than they did if they had purchased in April to get approved for a home loan, calculations from Canstar show.

If interest rates rise in line with forecasts and they are still house hunting by March, they would need another $9000 pay rise.

To avoid mortgage stress they would need a $42,000 pay rise from April to now, and about another $14,000 by March. Mortgage stress is defined as more than 30 per cent of earnings going to repayments.

In Melbourne, where the median house is now valued at $937,131 on CoreLogic data, a house hunter would need a $23,000 pay rise from April to now, and another $6000 by March.

To be mortgage-stress free they would need to lock in a pay rise of $35,000 since April, and more than $10,000 extra by March.

The modelling includes a 3 per cent buffer from the banks, and assumes that borrowers will have a 20 per cent deposit and slash their living expenses to rock bottom levels. It assumes interest rates rise and house prices fall as Westpac forecasts.

It was a similar story in Brisbane, where buyers would need to earn $22,000 since April to buy now, and another $10,000 if they do not buy until March.

And in Perth, buyers would need to add $18,000 to their pay packet to buy now compared to April, and another $7000 by March.

Sydney-based Equilibria Finance managing director Anthony Landahl said potential buyers looking for a loan were being careful about how much they borrow.

Those with existing mortgages were now starting to feel the heat from interest rate rises, he added.

“The biggest challenge has been the speed of the increase,” Landahl said. “Since the interest rate rises started back in May, a lot of people worked out they had a buffer of savings or had made additional repayments, but they’re now getting concerned with how much further these can go.

“A lot of people are still adjusting their budgets because they realise their redraw or offset accounts or their savings is being cleaved into.”

Canstar group executive Steve Mickenbecker said mortgage holders should go to their bank to get the best interest rate deal or look at refinancing.

He said the modelling brought into stark view the impact interest rate rises were already having on recent buyers.

Those who would be hard hit include first home buyers with smaller deposits and those who got into the market recently, and had not had time to pay their mortgages down.

“They’re the ones that are going to feel severe stress here,” Mickenbecker said. “This whole dream of saving four or five years and finally buying the land and getting in, and interest rates have gone up by more quickly than expected, so it’s just another kick in the teeth.”

He said options included going interest-only for less than five years or taking a second job as a last resort.

“Don’t take your eye off the longer term,” Mickenbecker said. “These times do pass. Wages go up, and the stress becomes lower … you don’t want to lose your spot in the property market.”

Westpac senior economist Matthew Hassan said Reserve Bank figures showed mortgage holders had $100 billion sitting in their offset accounts in Australia but those with higher incomes would have more of a buffer than those on an average income.

Banks were keeping a close eye on the impact of interest rate rises, as there was usually a lag of between three and six months before they would hit.

“We’re not seeing so much in the way of mortgage stress coming through the household sector at the moment but when it does, we know there’s going to be a big jolt,” Hassan said.