A quarter of mortgage holders could fall into mortgage stress if interest rates continue to rise as predicted, the Reserve Bank of Australia (RBA) has warned.
The finding is based on the official cash rate rising to 3.60 per cent by the end of 2023, which would be an increase of 3.50 per cent from its record low at the start of the pandemic.
If that were to happen, the RBA’s Financial Stability Review found that 25 per cent of borrowers will be spending over 30 per cent of their income on repayments.
This figure could be even higher if unemployment climbs and incomes do not grow as expected, the central bank noted.
“Some households are already feeling the strain from higher interest rates and inflation, and this is likely to continue for some time,” it said.
“A small number of borrowers have both high debt relative to their income and low saving and equity buffers; these households are particularly vulnerable to shocks.”
How high will interest rates go?
The big four banks are predicting another 0.25 per cent increase in November. But they are divided on how high rates will go after that.
Westpac predicts the cash rate will peak at 3.60 per cent in March 2023, followed by four 0.25 per cent cuts in 2024.
ANZ is forecasting a 3.60 per cent peak in May 2023, followed by two 0.25 per cent cuts in 2024.
Commonwealth Bank doesn’t think interest rates will go as high and is predicting a 2.85 per cent peak in November, before two 0.25 per cent cuts in August and November 2023.
Lastly, NAB is expecting a 3.10 per cent peak in February 2023.
If these predictions are correct, research by RateCity found that borrowers will pay an extra $760 to $983 a month on a $500,000 loan compared to May 2022.
RateCity research director, Sally Tindall, said borrowers need to be prepared for more rate rises.
“Make certain you’re ready for these hikes by checking what your monthly repayments will be if your rate rose by another 1 per cent after this hike,” Tindall said.
“If you can, put your budget to the test by making these higher repayments now to see how it holds up.
“If the numbers don’t add up, start making changes today. Open your banking app up and look at where your money is going.”
If you are having trouble make sure you ask your bank for help early, Tindall said.