Australians suffer amazing interest rates as they get off their fixed rate mortgages
- Reserve Bank is more concerned about fixed rate borrowers
- Predicted that 9 percent of borrowers will have no savings by 2024
Australian borrowers are now facing a 65 percent increase in their monthly mortgage rates as ultra-low fixed rates begin to wind down – much to the Reserve Bank’s concern.
The RBA this month left the spot rate on hold at an 11-year high of 3.6 percent.
But with inflation still well above the target of 2 to 3 percent, both the Commonwealth Bank and Westpac expect another rate hike that would bring inflation to 3.85 percent in May. ANZ now expects that rate hike to be delayed until August.
Ultra-low fixed mortgage rates, below 2 percent, will expire in the coming months, abruptly forcing borrowers into much higher “revert” variable rates — which could rise to 7.18 percent, should there be one more RBA rate hike.
A borrower with an average $600,000 mortgage would see his monthly payments rise 65 percent to $4,163 — an increase of $2,518 — if he didn’t refinance, RateCity calculated.
Australian borrowers coming off a fixed-rate mortgage and one in 10 borrowers with insufficient savings are most at risk of mortgage stress, Reserve Bank says (photo is a stock photo)
Fixed-rate borrowers face a 65% increase in monthly loan repayments: ‘repayment rates’ revealed
$500,000: $2,099 per month under a flat rate of 1.92 percent in May 2021 becomes $3,469 per month under a ‘payback’ variable rate of 7.18 percent
$600,000: $2,518 per month under a flat rate of 1.92 percent in May 2021 becomes $4,163 per month under a ‘revert’ variable rate of 7.18 percent
$700,000: $2,938 per month under a flat rate of 1.92 percent in May 2021 becomes $4,856 per month under a ‘payback’ variable rate of 7.18 percent
$800,000: $3,358 per month under a flat rate of 1.92 percent in May 2021 becomes $5,544 per month under a ‘revert’ variable rate of 7.16 percent
$900,000: $3,778 per month under a flat rate of 1.92 percent in May 2021 becomes $6,237 per month under a ‘payback’ variable rate of 7.16 percent
$1,000,000: $4,197 per month under a flat rate of 1.92 percent in May 2021 becomes $6,930 per month under a ‘payback’ variable rate of 7.16 percent
Methodology: RateCity calculations showed that in May 2021, the Big Four banks offered an average two-year fixed interest rate of 1.92 percent. The revert rate of 7.18 per cent is a standard variable rate based on a Reserve Bank of Australia cash rate of 3.85 per cent by May 2023, as the Commonwealth Bank and Westpac forecast. Concerns a 25-year loan. Loans over $750,000 would have a 7.16 percent fallback rate because NAB has a lower rate for larger loans.
Variable-rate borrowers have seen their monthly repayments rise 48 percent to $3,415 since May last year — up from $2,306 when the RBA money rate was still at a record low of 0.1 percent.
This happened when the Commonwealth Bank loan rate, for those with a down payment of at least 20 percent, rose from 2.29 percent to 5.52 percent.
While floating-rate borrowers have seen their budgets squeezed, the RBA’s Financial Stability Review for April was more concerned about the 880,000 fixed-rate borrowers whose ultra-low interest rates expire in 2023.
“On some measures, fixed-rate loans seem a bit riskier than floating-rate loans,” it said.
“Fixed-rate borrowers generally have larger balances relative to the borrower’s income and higher loan-to-valuation ratios than floating-rate loans.”
The Reserve Bank of Australia said fixed-rate borrowers also had “less time to build equity or liquidity buffers.”
The Reserve Bank has revealed that it is more concerned about fixed rate borrowers than floating rate borrowers, predicting that 9 percent of all borrowers will have no savings by 2024 (pictured is an auction in Sydney)
“Some fixed-rate borrowers may be at greater risk of going into financial stress if their mortgage payments rise,” it said.
The Reserve Bank calculated that 14 percent of borrowers would run out of savings by mid-2024 without cutting their “non-essential” spending.
But 9 percent of borrowers would use up their savings anyway “even if they cut their non-essential spending by “relatively extreme amounts” — or by 40 to 80 percent.
Australia is facing its worst cost-of-living crisis since 1990.
Inflation reached a 32-year high of 7.8 percent in 2022.
Although the monthly data for February moderated to 6.8 percent, headline inflation is still well above the RBA target of 2 to 3 percent.