The Reserve Bank’s deputy governor is confident most mortgage borrowers can cope with rapidly rising interest rates, even as analysts suggest many households could soon face extra payments of $1,000 a month or more.
- Nearly a third of borrowers could face a 40 percent increase in monthly mortgage payments next year.
- Monthly payments could increase by $650 for a typical home with a fixed-rate loan
- ANZ economists say the unemployment rate is likely to fall below 3 percent.
RBA Deputy Governor Michele Bullock said Australian households were generally in a good position to weather upcoming interest rate increases.
He said rate hikes are unlikely to increase financial stability risks stemming from the household sector.
However, despite his optimistic views on raising rates, he said extremely low interest rates during the pandemic had encouraged many people to take out fixed-rate home loans, and the proportion of home credit in Fixed-rate mortgages jumped from 20 to nearly 40 percent. penny.
And most of those fixed rates would expire next year, leaving millions of households moving to much higher variable rates, he acknowledged.
What will happen when the fixed rates are renewed?
Speaking in Brisbane, Ms Bullock said the RBA board would be watching closely how households responded to rate increases this year.
She said that households with fixed-rate mortgages had been protected from interest rate increases until now.
However, most of those fixed-rate loans will mature in the next two years, with the largest concentration of loans due in the second half of 2023.
“What’s the potential impact when they break off?” she asked.
He said that assuming variable mortgage rates rise by 3 percentage points by mid-2023, households that switch to variable rates will face much higher mortgage costs next year.
“Assuming that all fixed-rate loans move to variable mortgage rates and that the new variable rates are largely informed by current market prices, estimates suggest that about half of fixed-rate loans [by number] would face an increase in reimbursements of at least 40 percent,” he said.
“This is slightly more than the increase in payments that variable-rate borrowers would experience during this time.”
Prepare for four more oversized rate hikes, ANZ warns
Ahead of Ms Bullock’s assessment of how households would deal with rising rates, the ANZ economics team significantly revised its cash rate forecast on Tuesday morning, predicting there will now be four interest rate hikes in the next four months, with a value of 0.5 percentage points each.
That would take the RBA’s cash rate target from 1.35 percent, where it currently stands, to 3.35 percent for November.
David Plank, head of Australian economics at ANZ, said the labor market was becoming so tight that it was contributing to inflation risks.
“Our long-standing forecast has been for the unemployment rate to fall to 3.3 percent by the end of 2022,” he said.
“The risks to this forecast appear to be weighted to the downside, even with rate increases somewhat faster than before.
However, Plank is also relatively relaxed about the effect rising mortgage payments will have, given that very few Australians are out of work.
“Faster movement toward tightening rates will bring forward the point at which the economy slows below trend,” he argued.
“It also suggests that house prices will fall more than the 15 percent or so that we currently anticipate by the end of 2023.
“But it doesn’t necessarily mean a hard landing for the economy. A cash rate of 3.35 percent implies that household interest payments as a percentage of household income peak below the level reached in 2008.” .
What about monthly mortgage payments?
RateCity.com.au research director Sally Tindall said that if the cash rate reaches 3.35% in November, as ANZ predicted, someone with a $500,000 mortgage would see their monthly payments increase by $909 in the space of just seven months. , since the RBA started moving in May.
For someone with a $1 million mortgage, monthly payments would increase by $1,818.
“Many families are already under pressure with skyrocketing grocery and gas costs. Sharp increases in mortgage payments, on top of this, could push some into the red.”
Who has the debt?
However, Ms. Bullock also said that it was important to know who had the debt, because not all borrowers were the same.
She said most home debt was tied to households that had the income to pay it off.
“If you look at households that have debt, almost three-quarters of outstanding debt is held by households in the top 40 percent of the income distribution,” he said.
“Indebted households in the bottom 20 percent of the income distribution have less than 5 percent of the debt.
“Furthermore, households with a high debt-to-income ratio [DTIs] Those who could be most affected by an increase in interest rates also tend to be high-income households.
She said that suggested a large number of households were likely to be able to handle “somewhat higher” interest rates.
What about falling house prices?
Ms. Bullock also addressed concerns about falling house prices.
He said that if house prices fell 20 percent, the proportion of loan balances that would be in negative equity would rise from 0.1 percent to 2.5 percent; it was 2.25 percent before the pandemic.
“Negative equity” is a situation where the value of your property falls below the amount of money you still owe on your mortgage.
“Scenario analysis based on loan-level data suggests that a decline in house prices of 10 percent would increase the proportion of balances in negative equity to 0.4 percent, which is still much lower than its peak.” of 3.25 percent in 2019″. she said.
“Even a 20 percent drop in house prices would only increase the proportion of balances in negative equity to 2.5 percent.
“This low incidence of negative equity reduces the likelihood that borrowers will default, as well as the size of the losses incurred by lenders if they did.”