Digital Finance Analytics has examined the ability of Australian households to meet their mortgage commitments if interest rates rise, and says the findings are "distressing".

The survey of 26,000 households looked at household income, the size of the mortgage, forward payments, and other financial commitments. 

The study showed that around 20 per cent of households would have difficulty meeting their mortgage commitments if interest rates rose a mere 0.5 per cent, or less. 

A total of 42 per cent of households said they would struggle to meet their financial commitments if mortgage interest rates were to increase from today's 4.5 per cent average to the long term average of 7 per cent.

With the major banks already lifting rates, particularly for investors, the insights are particularly pertinent.

"So as interest rates rise and leave mortgage holders in its dust, it leaves a huge section of society, and our economy, exposed and at risk," says a blog by Digital Finance Analytics.

While property prices are rising and with interest rates still at record lows, it's hardly surprising that Australians have taken on large amounts of debt and piled into property, says Martin North, principal of Digital Finance Analytics.

“People have been buying into property because they really believe that it is the best investment," North told news.com.au.

But North has warned that wages growth is unlikely to keep pace with rises in interest rates, which could leave some households vulnerable.

“My concern is a lot of households are quite close to the edge now," he said. "They are not going to get out of jail because their incomes are going to rise. We are in a situation where interest rates are likely to rise irrespective of what the RBA does.”

Australia’s wages grew at the slowest pace on record in the three months to September 2016, according to the Australian Bureau of Statistics's latest Wage Price Index.

Since 1988, Australia’s debt-to-income ratio has almost tripled from 64 per cent to a current rate of 185 per cent, according to the AMP's latest NATSEM Income and Wealth report.

“The ratio of debt to income is as high as it’s ever been in Australia and there are some households that are very, very exposed,” said North.

North believes banks need to take a more rigorous approach to home lending.

"I’m questioning whether the underwriting standards are tight enough,” North said, singling out buyers that get help from the 'Bank of Mum and Dad' as a group that could be most at risk.

North says his research shows this group is "nearly twice as likely to end up in difficulty", and says they tend to struggle because "they haven’t had the discipline of saving.”

See also:

More Australians lumped with mortgage later in life

Affordability worsens as bigger mortgages erode benefits of lower rates

Big four banks lift mortgage interest rates

"I've felt mortgage stress"