Interest rates

Reserve Bank keeps interest rates on hold for now, but homeowners brace for mortgage shock

The Reserve Bank has left the official cash rate on hold near zero, but borrowers are already preparing for what life could look like with higher mortgage interest rates.

Sophie Miller and her partner Trent Williams are among them, having bought their house in Adelaide two years ago.

Their family budget has since tightened after the birth of their first child, which has seen expenses increase and Sophie’s income decrease during her maternity leave.

“[A rate rise] is definitely something that worries me a lot,” Ms. Miller said.

“Even if it doesn’t increase, we have to make a little more room in our budget, because living and household expenses are so high at the moment.

It’s an experience more than a million Australian mortgage borrowers, like Sophie and Trent, have never had to deal with.

The Reserve Bank’s benchmark interest rate has been 0.1% since November 2020 and has not increased since November 2010, when it reached 4.75%.

However, most analysts expect an interest rate hike by August, with some expecting the first rate hike in June, and a few even suggesting it could happen next month.

“Severe budget cuts” to cope with rising rates

Analysis by financial comparison website RateCity shows a borrower with 25 years remaining on a $500,000 mortgage can expect to pay just over $300 per month in additional repayments by March of next year, if interest rates rise in line with the forecasts of the Commonwealth Bank (CBA).

The ABC forecasts the spot rate to be 1.15 percentage points higher by then, at 1.25%.

A survey of around 1,000 mortgage borrowers conducted for RateCity found that the Miller-Williams household are far from alone in worrying about how they will be able to afford the rate hike.

The survey found that almost a third of borrowers would need to “significantly cut” their spending to meet the extra repayments, with another third needing to make “minor reductions”.

Worryingly, 14% of respondents said they “would not be able to afford the refunds”, while less than a quarter said they could afford the increase without changing their spending habits.

“People who have struggled to enter the housing market recently may feel the heat of upcoming rate hikes,” said Sally Tindall of RateCity.

Younger households, most of whom would have bought their homes more recently, were more vulnerable according to the survey.

Only 18% of 25-34 year olds and 21% of 35-44 year olds said they could afford a mortgage payment increase of $300 a month without any reduction in spending.

Meanwhile, 31% of 45-54 year olds and 26% of 55-64 year olds said they would be able to absorb the extra cost.

Ms Miller said for her household a few rate hikes wouldn’t break the bank, but it would mean they would have to spend less.

“Having an extra $300 from your budget each month would be great,” Ms. Miller said.

“And, as a new mom, I’m really aware that I want to socialize for myself.”

RBA is no longer “patient”

Ms Tindall said this type of economic flow effect would likely cap the number of rate hikes the Reserve Bank would implement.

“While markets currently expect the cash rate to be above 3% in 18 months, it is almost impossible to see the RBA reaching such a high level in this time frame,” she explained.

“A lot of people who have bought recently are already mortgaged to the end and the RBA is well aware of that. The central bank is not going to raise the cash rate so far and so fast that people start defaulting on their bonds en masse. mortgages.”

Reserve Bank Governor Philip Lowe seems to be on the same page.

“Rising prices are putting pressure on household budgets and flooding is causing hardship for many communities,” he observed in his post-meeting statement.

Most economists now expect the first rate hike to come by August, if not sooner.(ABC News: Michael Janda)

However, the statement also deleted the phrase that the board was “prepared to be patient” before raising interest rates, which many economists had flagged ahead of the meeting as a sign that a rise in rate was approaching.

To counterbalance this, Dr Lowe referred to evidence “over the next few months”, implying that a move was not imminent in May, or possibly even June.

“Inflation has picked up and a further increase is expected, but labor cost growth has been below rates that are likely to be consistent with inflation sustainably on target,” he said. he declared.

“The Board will assess this and other incoming information as it sets policy to support Australia’s full employment and on-target inflation outcomes.”

Nevertheless, the absence of “patient” was enough to see many analysts who had seen a rate hike not come until later in the year to advance their forecasts.

“We expect the RBA to tighten by 15 basis points in June (previously September) with follow-up rate hikes of 25 basis points in July and August,” said ANZ’s Australian head of economy. , David Plank.

“We see another 25 basis points in November, which will bring the cash rate target to 1% by the end of 2022.

“From there, we expect rate hikes of 25 basis points in each quarter of 2023, bringing the cash rate to 2% at the end of 2023.”

The “polarizing effect” of the COVID pandemic

The Reserve Bank juggles a very divided economy, between those struggling post-COVID and those who have weathered the pandemic, at least financially.

RateCity research found that almost a quarter of home loan borrowers would still be able to afford $300 more per month in repayments without changing their spending habits at all.

This is likely the same group of people behind statistics from banking regulator APRA showing that money saved in clearing accounts hit an all-time high of $232 billion.

“COVID has had a polarizing effect on family budgets over the past two years. While some households struggle to make ends meet, others have more money saved on their home loan than ever before,” said said Ms Tindall.

“According to APRA, the average borrower is 45 months ahead of their mortgage payments, or nearly four years ahead of their debt.

“These people have big buffers to fall back on if they can’t find enough money in their monthly budget to pay the bills, and that’s a good thing.”