The Reserve Bank of Australia (RBA) has flagged a potentially massive jump in mortgage repayments for some borrowers.
Speaking at the ESA (QLD) business lunch, RBA deputy governor Michele Bullock said the RBA is expecting further interest rate increases.
“The board expects further increases in the cash rate will be needed in the months ahead,” Bullock said.
“Just how high and how fast the cash rate is raised will depend on many factors, but in making this assessment, one of the areas the board will be closely observing is how households respond to the combination of rising interest rates and prices.”
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Bullock said rising interest rates, declining house prices and higher inflation has increased the cost of living for everyone.
“The effect of these developments on households and the way they respond will have implications not only for the broader economy, they will also highlight the financial vulnerabilities that have been building in the household sector,” she said.
Bullock said that around one third of Australian households have housing debt.
“Highly indebted households are especially vulnerable in the event of a loss of real income through higher inflation, particularly if combined with rising interest rates, and a decrease in housing prices,” she said.
How high might interest rates go?
Bullock didn’t give a number, but did indicate that around 30 per cent of households could be at risk of financial instability if the cash rate were to rise in line with market expectations.
Currently, the market is anticipating a 3 per cent interest rate rise by mid-2023.
“Just under 30 per cent of borrowers would face relatively large repayment increases of more than 40 per cent of their current payments,” she said.
But the major issue could come for those who locked-in an ultra-low fixed rate in 2020 or 2021.
Fixed rates were so low during the pandemic that the share of housing credit on fixed mortgage rates increased from 20 per cent at the start of 2020 to 40 per cent this year.
And now, the majority of these fixed terms are set to expire late next year - with borrowers who took them up in for a nasty surprise.
“Borrowers with fixed-rate loans that are due to expire by the end of 2023 would experience a median increase of around $650 (or 45 per cent) in their monthly repayments,” Bullock said.
“This is slightly more than the rise in payments that variable-rate borrowers would experience over this time.”