Anyone who shouldered a mortgage in 1980s and early 1990s would remember the pain of variable rates hitting 17%. However, that’s nothing compared to the havoc rate rises could inflict on borrowers today, warns Nicole Pedersen-McKinnon, finance educator, commentator, and ASIC ambassador, in an op-ed for The Sydney Morning Herald.

“There's been pundit talk of an imminent eight [rate rises], while the Reserve Bank has confirmed a ‘neutral’ setting would be that same 200 basis points higher,” Pedersen-McKinnon said.

Her calculations show that from Australia’s historically low official levels (the average variable rate is 5.25%), each rate rise would consume 43% more of income than it did at the mortgage interest peak in the 1980s.  

“Such has been the failure of wages to keep pace with the spectacular growth in property prices,” she said.

Despite the high interest rates of the 1980s, various figures from the Australian Bureau of Statistics (ABS) reveal that the average Aussie home loan was only 2.5 times the typical income during this period: $67,350 versus $26,437. Pedersen-McKinnon averaged the loan size over the 10 months the Reserve Bank home loan indicator rate stayed at 17%, which was from June 1989 to March 1990.

“Today, the loan-to-take-home has spiked to almost five times, or $380,000 against $79,721. Indeed, we are poised to smash our former borrowing record, possibly as early as next week, of $382,800 in November 2015,” Pedersen-McKinnon said.

“What it all means is that although one 25 basis point rate rise wiped out just 0.6 per cent of someone's income nearly three decades ago (costing $156 a year or $13 a month), that figure is closer to a whole per cent today ($684 or $57). Four of them would now add $2760 to the typical annual repayment, and suck up 3.5 per cent of income (versus 2.4 per cent in the '80s/'90s).”

Today’s equivalent of the infamous 17% interest rate is a home loan rate of just 8%.

“In other words, it's at 8 per cent that mortgage repayments would grow to consume 44 per cent of our incomes – the heart-breaking proportion homeowners were forced to hand over previously,” Pedersen-McKinnon said.

For mortgage repayments, 8% would mean an average $2,933 a month or $35,196 each year.

“For a current repayment benchmark, at 5.25 per cent it's an average $2277 a month – or $27,324 a year. Which means the typical home owner is already on the verge of tipping into ‘mortgage stress’, defined as [committing] beyond one-third of their income. The average repayment percentage, even at our current record low rates, is 34 per cent,” she said.