Many economists worry that Australians are creating unprecedented levels of debt because of record-low interest rates, skyrocketing house values, and especially on the east coast. It could prove to be a problem if interest rate rises next year.

Nearly 25% of Australians may be facing financial difficulties. The Bureau of Statistics of Australia (ABS), has released the most recent data showing that 21% of Australian households have too much debt.

“Given that household debt is higher than it’s ever been, [and] given that property prices are higher than they’ve ever been, given that people have to take out larger mortgages than they’ve ever had to before, it’s reasonable to expect that [overall debt] has been climbing,” said Cameron Kusher, research analyst at Corelogic.

Australians currently owe $1.6trn in residential property. Because rates are so low, this is acceptable for the moment. Economists predict that rates will rise again. Two rate increases are predicted by Australia and New Zealand Banking Groups and National Australia Bank (NAB) in 2018.

Homeowners under 40 can suffer from rising interest rates. The most recent edition of the Household, Income, and Labour Dynamics in Australia Survey (HILDA)Between 2002-2014, the average mortgage debt for homeowners under 40 years of age doubled.

Younger borrowers didn’t get off scot free, though: After taking inflation into account, the HILDA survey found that the average mortgage among 18 to 39-year-olds ballooned from $169,201 in 2002 to $336,586 in 2014, a real increase of 99%.

Many generations of borrowers have been accustomed for many years to steady or decreasing interest rates. Rate increases may surprise them. In August 2016, the official cash rate was adjusted for the last time. It’s been nearly seven years since the last rate change.

What would your future payments look like?

On a $350,000 home loan, a 1% rate increase would mean you’d have to pay an additional $214 each month. A 2% rate rise would require an additional $306.

As for a $500,000 home loan, if rates go up 1%, you’d have to pay an additional $439 each month. If the rate increased by 2%, you would be paying $627 more per month.  

Many borrowers in some of Australia’s hottest property markets – such as Sydney and Melbourne – may not be particularly worried about impending rate hikes, as their homes have soared in value.

Paul Dales, chief economist for Capital Economics in Australia, believes that homes are worth more than 30%.

“As and when rates do go up, I do think it will probably hit home quite quickly,” he said. “From now on, I think people need to realise that, at best, house prices might move sideways over the next few years and, at worst, they could fall a little bit.”

Dales said that “little bit” could actually be 10%.

Protective measure against rate increases

If you’re a homeowner, consider refinancing now to safeguard yourself against rate rises and mortgage stress. Your current mortgage rate may be higher than the market’s. Ask your lender to match it, or offer you a better deal.

To help pay your mortgage off faster, you could also put aside additional funds. By adding $20-30 per week to your mortgage payments, you could save money.

As for those who’re thinking of entering the property market, consider future rate hikes. Borrowers should add 2% to 3% to the current interest rates when calculating how much they can afford to repay.