RBA says borrowers can handle interest rate hikes, but experts warn mortgage repayments will rise

Reserve Bank deputy governor confident most mortgage borrowers can handle a rapid rise in interest rates, though analysts suggest many households could soon face $1,000 a month or more in additional refunds.

RBA Deputy Governor Michele Bullock said Australian households were generally in a good position to weather future interest rate hikes.

She said the rate increases were unlikely to increase financial stability risks stemming from the household sector.

However, despite her bullish views on rising rates, she said extremely low interest rates throughout the pandemic had encouraged many people to take out fixed-rate mortgages, the share of mortgages on mortgages. fixed rate mortgages from 20 to almost 40 percent. hundred.

And the bulk of those fixed rates would expire next year, leaving millions of households to switch to much higher variable rates, she acknowledged.

What will happen when the fixed rates are renewed?

Speaking in Brisbane, Ms Bullock said the RBA’s board would carefully monitor household reaction to rate hikes this year.

She said households with fixed-rate mortgages had so far been protected from interest rate increases.

However, the majority of these fixed rate loans are due to expire within the next two years, with the greatest concentration of loans expiring in the second half of 2023.

“What is the potential impact when they fall? ” she asked.

She said that assuming variable mortgage rates would increase by 3 percentage points by mid-2023, households switching to variable rates would face much higher mortgage costs next year.

“Assuming all fixed rate loans move to variable mortgage rates and new variable rates are largely informed by current market prices, estimates suggest that around half of fixed rate loans [by number] would face an increase in refunds of at least 40%,” she said.

“That’s slightly more than the rise in payments variable rate borrowers would experience over this period.”

Prepare for four more big rate hikes, warns ANZ

Ahead of Ms Bullock’s assessment of how households would cope with the rate hike, ANZ’s economics team significantly revised its cash rate forecast on Tuesday morning, predicting there will now be four rate hikes interest rate over the next four months, worth 0.5 percentage points each.

This would take the RBA’s cash rate target from 1.35%, where it currently stands, to 3.35% by November.

David Plank, head of the Australian economy at ANZ, said the labor market was becoming so tight it was contributing to inflation risks.

“Our long-held forecast is for the unemployment rate to fall to 3.3% by the end of 2022,” he said.

“Risks to this forecast appear to be weighted to the downside, even with somewhat faster rate hikes than before.

However, Mr Plank is also relatively relaxed about the effect the rise in mortgage repayments will have, given that so few Australians are out of work.

“The faster move to a restrictive rate setting will advance the point at which the economy slows below trend,” he argued.

“It also suggests that house prices will fall by more than 15%, or so, than we currently expect through the end of 2023.

“But that doesn’t necessarily mean a hard landing for the economy. An interest rate of 3.35% implies that household interest payments as a percentage of household income peak below the level reached in 2008.”

What about monthly mortgage repayments?

RateCity.com.au research director Sally Tindall said if the cash rate hits 3.35% by November, as ANZ predicts, someone with a $500,000 mortgage would see their repayments monthly increase of $909 in the space of just seven months. , since the RBA began to move in May.

For someone with a $1 million mortgage, monthly repayments would increase by $1,818.

“Many families are already under the pump with skyrocketing grocery and gas costs. Large increases in mortgage repayments, on top of that, could push some people into the red.”

Who owns the debt?

However, Ms Bullock also said it was important to know who held the debt because not all borrowers were alike.

She said the majority of housing debt is attached to households that have the income to pay it off.

“If we look at indebted households, nearly three-quarters of the debt stock is held by households in the top 40% of the income distribution,” she said.

“Indebted households in the bottom 20% of the income distribution hold less than 5% of the debt.

Breakdown of household debt
The richest 40% of households by income account for nearly three-quarters of outstanding debt(Source: Reserve Bank of Australia)

“Furthermore, households with high debt ratios [DTIs] who could be most affected by a rise in interest rates also tend to be high-income households.

She said that suggested that a large number of households would likely be able to manage “a bit higher” interest rates.

What about falling real estate prices?

Ms Bullock also raised concerns about falling house prices.

She said if house prices fell by 20%, the share of loan balances that ended up in negative equity would rise from 0.1% to 2.5% – it was 2.25% before the pandemic.

“Negative equity” is when 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% would bring the share of balances in negative equity to 0.4%, which is still well below its peak of 3.25% in 2019,” she said.

“Even a 20% drop in house prices would only increase the share of balances in negative equity to 2.5%.

“This low incidence of negative equity reduces the likelihood of borrowers going into default, as well as the magnitude of the losses lenders will incur if they do.”

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