Since May last year, the RBA began its path to delivering the most aggressive rate hiking cycle in memory, lifting the cash rate from 0.10% to 4.10%

And despite an interest rate pause this month, the RBA knife has well and truly been dug in.

While some may argue: rate hikes are what’s needed to contain inflation in a bid to reach the central bank’s 2-3% target objective, and borrowers need to hang in there for a bit longer, the reality is rising rates have hit Aussie mortgage holders the hardest.

Yes, the RBA has not pushed up its cash rate as much as other countries, but there’s an important difference between Aussie borrowers and borrowers in those countries.

Country Cash rate Annual Headline CPI
Australia 4.1% 7% (March)
United States 5-5.25% 4% (May)
Canada 4.75% 3.4% (May)
New Zealand 5.5% 6.7% (March)
United Kingdom 5% 8.6% (May)

Cash rates and CPI around the world as of 12/07/23

The variable-rate mortgage is our ‘go to’

Aussie borrowers absolutely froth a variable-rate mortgage. The Norwegians are the only country who use them more than us.

Roughly 70% of Australian mortgage holders are on variable rates. That’s compared to 35% in Canada, 15% in the United Kingdom, 10% in New Zealand, and less than 5% in the United States.

Fixed rates enjoyed their time in the sun in mid-2021 when more than half of all new mortgage commitments in Australia were on fixed rates - this was made possible by the RBA lending money to banks at cheap rates.

Now that's all flipped on its head, with fewer than 5% of mortage holders opting for a fixed rate in May 2023.

RBAVariableRates.PNG

And while some Aussies do prefer the security of locking in a fixed-rate, the term is not for nearly as long as what’s considered ‘normal’ in the US - which is 30 years.

That's because in the United States, large pools of mortgages are underwritten by the government's mortgage agencies - Fannie Mae and Freddie Mac - making it easier for banks to offer fixed loans and to spread risk more evenly.

Imagine if you had locked in your interest rate back in the early 1990s. You’d still be paying off your home loan at 17.50%… You probably would have broken your fixed-rate by then though.

Even in the UK and Canada, the most common fixed-rate loan term is five years. That’s compared to the Australian average of about two to three.

So, while borrowers in other countries have a safety net (so to speak) around them with a fixed-rate, Aussie borrowers have been grappling with significant increases to their repayments over the past 14 months.

PRD Chief Economist Asti Mardiasmo said Australia has fixed terms for much shorter periods than most countries, which puts borrowers at a greater risk when there are changes in the cash rate and/or economic conditions.

“As new mortgage holders are offered short fixed-terms at different rates, our ability to predict mortgage costs is less and can fluctuate wildly,” Dr Mardiasmo told Savings.com.au.

“For example, a person with a three year fixed term can plan better than someone who is on a one year fixed rate, hence the fluctuation.

“Home loans make up circa 30% of our income, so a lesser ability to predict or plan for this will have a higher impact on household budget management. Making us feel the cash rate changes even more so than other countries.”

Even the RBA confirmed this.

“Interest rates on loans with very long fixed-terms tend to be less sensitive to changes in the short-term interest rates targeted by central banks,” the RBA said.

RBAFixedTerms.PNG

Rate rises pass on much quicker in Australia

Because most Aussies are on variable-rate mortgages, the increase in average mortgage rates has been far higher than those in other countries.

As the below RBA chart shows, the rates paid in NZ had climbed by just over 150 basis points, the rates in the UK by only 50 basis points, and the rates in the US by almost nothing at all. 

If you look at Australia on the other hand, the rise in interest rates have hit households like a tonne of bricks.

RBAChangesMortgageRates.PNG

Plus, with house prices increasing significantly over the pandemic years, mortgages themselves have become so much bigger than they used to be.

In January 2020, the average home loan size for an owner-occupier was $504,000. Fast forward to May 2023 and that figure is now $585,000; the peak was $618,000 in January 2022.

In other words, we’re paying a lot more in rates than we would have a few years ago, and bigger home loans have made us more sensitive to it.

It's thought that the popularity of fixed rates in the United States hampers housing mobility and ease of transaction, which partly keeps a lid on home price growth.

Incentives during the Covid-19 dark days

Variable-rate mortgages aren’t the only reason Aussies are doing it tougher.

According to Dr Mardiasmo, the boom in the number of home loan mortgages happened in a ‘triple threat situation.’

  1. The cash rate was at a historical low and money was cheap
  2. Policy initiatives such as the homebuilder and other buyer schemes were strongly pushed forward
  3. There was a perception/belief that property prices were declining due to the pandemic

“Other countries had point A and to a certain extent point B, but not necessarily point C,” she said.

“This is our differentiator, which when combined with points A and B created a cohort of home loan mortgagors that were quite precarious as they entered the market with very little deposit and safety net, had never experienced cash rate changes before and thus did not know how to plan for it, and were not expecting cash rate changes anytime soon.”

Not done yet

For Australian mortgage holders, the end is so close, yet so far away. 

Markets and major bank economists are tipping at least one more rate hike in the coming months - either August or September, or both.

CommBank economists predict one last 25 basis point push next month to reach a peak rate of 4.35%. Meanwhile, ANZ, NAB, and Westpac each forecast a cash rate peak of 4.60%.

Either way, the mortgage pain will intensify and lift repayments even higher. 

And with the next RBA Governor set to take Dr Lowe’s position in September, who knows what could happen.


Advertisement

Buying a home or looking to refinance? The table below features home loans with some of the lowest interest rates on the market for owner occupiers.

Update resultsUpdate
LenderHome LoanInterest Rate Comparison Rate* Monthly Repayment Repayment type Rate Type Offset Redraw Ongoing Fees Upfront Fees LVR Lump Sum Repayment Additional Repayments Split Loan Option TagsFeaturesLinkCompare
6.04% p.a.
6.06% p.a.
$2,408
Principal & Interest
Variable
$0
$530
90%
Featured 4.6 Star Customer Ratings
  • No monthly or ongoing fees
  • Unlimited free redraw
  • No application fee
5.99% p.a.
5.90% p.a.
$2,396
Principal & Interest
Variable
$0
$0
80%
Featured Apply In Minutes
  • No application or ongoing fees. Annual rate discount
  • Unlimited redraws & additional repayments. LVR <80%
  • A low-rate variable home loan from a 100% online lender. Backed by the Commonwealth Bank.
6.14% p.a.
6.16% p.a.
$2,434
Principal & Interest
Variable
$0
$250
60%
Featured Unlimited Redraws
  • No annual fees - None!
  • Get fast pre-approval
  • Unlimited additional repayments free of charge
  • Redraw freely - Access your additional payments when you need them
  • Home loan specialists available today
Important Information and Comparison Rate Warning

Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to be made on variables as selected and input by the user. Some products will be marked as promoted, featured or sponsored and may appear prominently in the tables regardless of their attributes. All products will list the LVR with the product and rate which are clearly published on the product provider’s website. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. *The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Rates correct as of . View disclaimer.

Image by freepik





Ready, Set, Buy!


Learn everything you need to know about buying property – from choosing the right property and home loan, to the purchasing process, tips to save money and more!

With bonus Q&A sheet and Crossword!

By subscribing you agree to our privacy policy