Perth resident Tim Smith was hit with a financial shock when his monthly mortgage bill spiked $800 overnight following the expiration of the fixed-rate term on his loan earlier this year.

The father of two was paying a pandemic-era rate of just 2.45 per cent, but this rose to 6.5 per cent when he was thrown onto a market rate, reflecting more than a year of RBA rate increases.

“It was a huge whack,” he said.

“It had a flow-on effect because all your utilities are going up too.”

As his energy, childcare and grocery bills rose, Smith found his income wasn’t stretching as far.

“We had to rein in a lot of things,” he said.

“We started by cutting back on non-essentials and we stopped going out and doing things we used to enjoy. My entire pay was swallowed up by the mortgage, utilities and bills.”

Australians feel the squeeze

Smith is one of millions of Australian home owners struggling with higher mortgage bills as more than a year of Reserve Bank interest rate hikes take their toll on family budgets.

It’s the worst squeeze in the world, according to the International Monetary Fund (IMF), with Australians forking over a higher proportion of their income in repayments than in any other developed economy.

In dollar terms, the annual cost of servicing an average mortgage in Australia has risen by $14,688, according to an analysis published by comparison firm Finder on Thursday.

But as a home owner who had enjoyed a lower fixed rate during the initial phase of the RBA’s hiking cycle, Smith is part of a smaller cohort that have only recently started feeling the pain.

Mortgages in Australia are among the world’s most expensive. Photo: Getty

“I knew it was coming, but it wasn’t something we could avoid,” he said.

RBA assistant governor Christopher Kent said this week that the majority of Australians who fixed their loans during COVID have now reverted to market rates, with the proportion of loans being fixed falling from 40 per cent earlier this year to just 20 per cent today.

“Required household mortgage payments – interest plus scheduled principal repayments – have risen from around 7 per cent of household disposable income to almost 10 per cent,” he said.

“This is above estimates of the peak reached in 2008 when the cash rate was 7.25 per cent. And for those households with a large mortgage, required payments are a much higher share of their income.”

Refinancing misconceptions

Smith has managed to avoid the worst of the squeeze by refinancing with broker Open Home Loans to lower than 6 per cent, alongside consolidating other personal debts, which together saved his family $1200 a month.

He said while the process was daunting at first, he quickly realised it’s not as hard as many lenders make it out to be.

“There’s a misconception out there that it’s hard,” he said.

“The banks want it that way because they don’t want people to leave … but all we had to do was sign a few documents – it was a lot easier than I thought.”

Market analysis shows that home owners with a good track record and a decent amount of equity built up in their property can access rates as low as 5.5 per cent at the moment.

Such low rates aren’t being advertised by major banks however, with Smith saying ditching one of the big four was ultimately the right decision for his family.

“I don’t believe in bank loyalty,” he said. “They’re nice when you first sign up … but you end up paying more.”