More mortgage pain on the horizon – experts

While experts disagree about how many more rate increases borrowers face, most believe there are more to come

More mortgage pain on the horizon – experts

Last year’s eight consecutive rate hikes are just the beginning of mortgage pain for Australian homeowners, experts warn.

Sally Tindall, research director at RateCity, told The Australian that economists vary on their outlook for further rate hikes. Some believe there will be one more hike, followed by cuts in late 2023. Others predict three more standard RBA hikes – taking the cash rate to 3.85% – followed by cuts in 2024.

“Make sure you can make your monthly repayments even if there’s three, potentially four more rate hikes, and make sure that’s in the budget because the time to make changes is now, not in six months’ time,” Tindall said.

Tindall said that while property prices could drop, prospective home buyers were likely to see more restrictive stress tests from lenders.

“Buyers will need to get the green light of approval from the bank, and that’s not easy to do at significantly higher rates,” she said. “These people are having to prove that they can still make their mortgage repayments at rates of 8% or more, and that’s going to be a significant hurdle.”

The cash rate is currently 3.1% – its highest level in more than a decade – after eight consecutive hikes. With those hikes have come affordability issues. Thanks to the RBA’s aggressive rate hikes, the average borrower with a $500,000 loan before rates started rising in May is now paying $834 more per month on their mortgage, The Australian reported.

If the central bank hikes rates to 3.85%, those borrowers would see a total increase of $1,058 per month since rates started rising.

Anne Flaherty, economist for REA Group, told The Australian that the nation was seeing the fastest interest rate rises since the 1980s.

“We saw incredible price rises over 2021 that were fuelled by those low interest rates and we saw close to 50% of people actually had fixed-rate mortgages, which means they’ve been immune to those interest rate rises,” she said. “[This] year we will start to see some of those fixed rates roll on to variable, so there will be a proportion of people who will be hit.”

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Shane Oliver, chief economist at AMP Capital, said further rate hikes would start to drive total mortgage payments to record highs relative to household income.

“This is likely to result in a sharp rise in mortgage stress – particularly as fixed-rate loans reset this year,” Oliver told The Australian.

As of October, about 35% of Australia’s $2.1 trillion in loans was on fixed-rate mortgages, the publication reported. Most fixed-rate borrowers with loans expiring in 2023 will see increases of three to four percentage points when they reset to variable rates.

Still, Oliver believes the official cash rate is at or “close to” its peak.

“I’d have to concede that there is a risk of one more hike, which could take us to 3.35%,” he said.

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