More home loan pain, rates to reach 3.6pc

Photo: Note Viriyarat (Copyright Australian Property Journal)
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THE Reserve Bank has raised interest rates by another 0.5% to 1.85% and warned there are further hikes ahead with economists tipping rates will peak at 3.6% – a level that could put 1.3 million households under severe mortgage stress.

RBA Governor Philip Lowe said yesterday said the increase is a further step in the normalisation of monetary conditions in Australia.

“The increase in interest rates over recent months has been required to bring inflation back to target and to create a more sustainable balance of demand and supply in the Australian economy.

“The board expects to take further steps in the process of normalising monetary conditions over the months ahead, but it is not on a pre-set path.”

Governor Lowe said the RBA places a high priority on the return of inflation to the 2-3% target.

Capital Economics senior economist Marcel Thieliant said that is clearly a tall order, given that the RBA now expects inflation to reach 7.75% by Q4 (6.0% previously) and to still be 4% by the end of next year (3.25% previously).

“What’s more, the Bank now expects the unemployment rate to fall a little further from its 48-year low of 3.5%, whereas it previously expected it to bottom out at 3.6%. As such, we’re sticking to our forecast that the Bank will lift the cash rate to 3.6% by early-2023, well above the analyst consensus of 2.7%,” he forecast.

However, Thieliant said it is clear that aggressive tightening is starting to take its toll on the economy.

“Indeed, the Bank downgraded its forecast for GDP growth for 2022 from 4.25% to 3.25% and for next year from 2.0% to 1.75% and it expects growth to remain similarly weak in 2024.

“With house prices now falling at the fastest pace in four decades, we expect GDP growth to slow more sharply next year than the Bank anticipates. The upshot is that we expect the RBA to start cutting interest rates again towards the end of next year.” Thieliant predicted.

AMP Capital chief economist Shane Oliver warns that many households will see significant mortgage stress with a 3% or more rise in interest rates.

“On average, the household sector is in reasonable shape once the rise in wealth, a build up in excess saving and mortgage buffers (people being ahead on their repayments) is allowed for. But averages can be deceiving – a bit like having one arm in the freezer and one in the oven and saying on average you are okay.

“While RBA analysis shows that just over one third of households with a variable rate mortgage will see no increase in their payments with a 3% rise in interest rates, more than a third of all households with a mortgage – whether variable or fixed – will see a greater than 40% increase (and much more so for those on fixed rates).

“Roughly speaking, this is about 1.3 million households.”

Oliver said rising interest rates coupled with falling real wages, will have a huge impact on spending in the economy and risk a significant rise in forced property sales.

“Coming at a time when home prices are already falling rapidly due the impact of rising rates on home buyer demand it will only add to home price falls, which will weigh further on consumer spending

“The surge in house prices and hence household debt levels over the last 30 years was made possible by falling interest rates. A rise in the cash rate to 3% or more would push total mortgage repayments (ie, interest and principal) to record highs relative to household income.

“Looked at another way – a new borrower with an average $600,000 mortgage will have seen around a $600 a month increase in their monthly repayment since April once the latest rate hike is passed through. That is roughly an extra $7000 a year. Taking the cash rate to 3.1% would imply an extra $12,300 a year since April in mortgage payments. This is a huge hit to the household budget and spending power.” Oliver concluded.

Canstar’s finance expert Steve Mickenbecker said for many borrowers it is a little late to start building a buffer with extra repayments.

According to Canstar, the latest increase will likely add a further $148 to monthly repayments for borrowers with a $500,000 loan or up to $297 for borrowers with a $1 million loan.

Canstar analysis shows the impact on home loan repayments of the combined May, June, July and August cash rate increases if passed on in full by lenders would add almost $500 to the monthly repayment for a borrower with a 30-year $500,000 mortgage or $1,000 for a $1 million loan over the same period.

If the cash rate reaches 2.85% this year, monthly repayments since April for a $500,000 loan over 30 years would skyrocket by $808 to reach $2,912 while those with a $1 million loan over 30 years would be paying an extra $1,619 taking repayments to $5,823 each month.

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