$550 extra per month mortgage shock for households

Cost of living increases are mounting for households after mortgage rises, driving consumers to a greater level of value seeking sensitivity.

Cost of living increases are mounting for Australian households, anchored on record-level interest rate rises over the last four months.

The RBA increased the cash rate to 1.85% last week, creating the fastest set of rate increases since 1994. These increases have all flowed through into household mortgage rates.

For the average $610,000 mortgage over a 25-year term, the sum 1.75% rate over the last 4 months, has caused an increase of $550 to monthly mortgage repayments. This is a shock to the household budgets of the 35%, or 3,242,449 Australian households with a mortgage.

With inflation now running at its highest since the early 1990s, further interest rate rises this year are inevitable. Forecasts are expecting flexible mortgage rates to go over 5.25% or triple what they were in Jan 2022. This means the pressure on household budgets has just started and is set to increase sharply.

These rising cost pressures have added fuel to the decline in consumer confidence. The Westpac-MI consumer sentiment index dropped 3.0% in July 2022. It now stands 83.8, the lowest level since April 2020. RBA statements that households will be able to draw on their savings to service mortgages are also unlikely to lift confidence.

When these mortgage cost increases are viewed in the context of other household expenditure the significance is stark.  The average household is spending $1,195 per month on food & groceries, according to the MealpulseTM food panel. This means an additional $550 per month mortgage repayment, 46% of food and grocery expenditure.

This will elevate value sensitivity, with likely impacts on product selection and response to promotional offers. It will likely flow into implications for retail product sales mix, with bulk products winning favour, as some shoppers trade away from premium and convenience offerings. Retail promotional messages will also be in the spotlight, with a higher focus on leading with value.

With further mortgage cost increases inevitable, over 30% of Australian households will be dealing with the sharp cost-of-living increases that are highly likely to affect their food buying behaviour.

Follow changes to category retail sales mix and retail promotional activity with Freshlogic Retail Market Analysis and Adwatch™ services.

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