Could you afford a 45% rise in mortgage payments?

author-avatar By
on July 19, 2022 Fact Checked
Could you afford a 45% rise in mortgage payments?

Reserve Bank Deputy Governor Michele Bullock says the majority of customers on fixed-rate home loans will roll into variable rates in the next two years.

By the end of 2023, the median home loan repayment could increase $650 per month, or 45%, if mortgage rates were 300 basis points higher.

This is more than the increase variable-rate home loan customers would face.

In a presentation to the Economics Society of Australia on Tuesday, Ms Bullock said the RBA has been considering how susceptible recent fixed-rate borrowers will be to higher rates when the fixed terms expire.   

"Unlike borrowers who hold variable-rate loans, we have very little visibility of how much saving those with fixed-rate loans have been doing in recent years," she said.

"But given the very low interest payments and the broad-based increase in household saving rates, it is likely that many of these borrowers will have accumulated savings outside their mortgages ahead of any potential increase in repayments." 

Fixed-rate home loans typically cap extra repayments at $10,000 per year, and RBA modelling shows half of owner occupiers on a variable rate have accumulated up to two years' worth of extra repayments.

The level of housing credit on fixed mortgage rates rose from 20% at the start of 2020 and peaked at nearly 40% in early 2022.

Rising debt-to-income (DTI) levels have also been flagged as a concern, particularly for first home buyers.

Ms Bullock said government programs such as the Home Guarantee have played a part. 

"Government policies to improve housing market accessibility for first home buyers during the pandemic also means that FHBs are more highly represented among this group of recent borrowers than they are in earlier cohorts," she said.

"Historically, FHBs have tended to have persistently higher LVRs [loan to value ratios] and lower liquidity buffers than other borrowers, making them more vulnerable to a given house price or cash flow shock.

"In an environment of increasing interest rates, there is a risk that households with high DTIs will find it more difficult to service their debt."

See Also: Refinance soon to avoid a mortgage prison, say lending executives


While Ms Bullock said the RBA will respond to economic conditions, major banks expect the cash rate to rise up to 3.35% by the end of 2022.

The RBA previously modelled that a 200 basis point rise in the cash rate could sink home prices up to 15%.

On Tuesday Ms Bullock said housing price falls of 20% could increase the rate of homeowners in negative equity from 0.10% in May 2022 to 2.50%.

It was 3.25% pre-pandemic.

"This low incidence of negative equity reduces the likelihood that borrowers will enter into default, as well as the size of losses incurred by lenders if they did," Ms Bullock said.

Ms Bullock also admitted much of the RBA's modelling does not take into account future economic forecasts - renewed forecasts are expected to be released following next week's inflation data.

"Having a job is the best way of ensuring that you can continue to meet repayments on your loan. How much the Board decides to raise rates will depend on developments in the economy, including how borrowers respond to higher rates. And we will continue to assess where the risks might materialise," she said.

Just relax aye: RBA

Despite some of the gloom, Ms Bullock said Australians are generally well-prepared to weather rate rises, with a third of households under a mortgage.

"Households have saved a large amount of money since the onset of the pandemic – around $260 billion," she said.

"In fact, if we take these savings into account, the ratio of household credit to income is actually a fair bit lower than the headline figure and is around the same as its 2007 level."

RBA data shows more than one third of borrowers on variable-rate mortgages have already been making average monthly loan repayments sufficient to meet the extra demands of interest rate rises.

"I would conclude that as a whole households are in a fairly good position. The sector as a whole has large liquidity buffers, most households have substantial equity in their housing assets, and lending standards in recent years have been more prudent and have built in larger buffers for interest rate increases," Ms Bullock said.


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.

Lender

Variable
More details
  • Min 30% deposit
  • No monthly or ongoing fees, add 0.10% for offset
  • Unlimited redraws

Variable Home Loan (LVR < 70%)

  • Min 30% deposit
  • No monthly or ongoing fees, add 0.10% for offset
  • Unlimited redraws
Variable
More details
REFINANCE ONLY
  • A low-rate variable home loan from a 100% online lender. Backed by the Commonwealth Bank.
REFINANCE ONLY

Variable Rate Home Loan – Refinance Only

  • A low-rate variable home loan from a 100% online lender. Backed by the Commonwealth Bank.
Variable
More details
AN EASY DIGITAL APPLICATION
  • No ongoing fees - None!
  • Unlimited additional repayments
  • Easy online application, find out if you're approved quick!
  • Redraw- Access your additional payments if you need them
  • Use the app to get loan insights to help you pay off your home loan faster
AN EASY DIGITAL APPLICATION

Neat Variable Home Loan (Principal and Interest) (LVR < 60%)

  • No ongoing fees - None!
  • Unlimited additional repayments
  • Easy online application, find out if you're approved quick!
  • Redraw- Access your additional payments if you need them
  • Use the app to get loan insights to help you pay off your home loan faster
Variable
More details
NO ONGOING FEES
  • No ongoing fees - None!
  • Unlimited additional repayments
  • Easy online application, find out if you're approved quick!
  • Redraw- Access your additional payments if you need them
  • Use the app to get loan insights to help you pay off your home loan faster
NO ONGOING FEES

Yard PAYG Home Loan (Principal and Interest) LVR ≤ 80%

  • No ongoing fees - None!
  • Unlimited additional repayments
  • Easy online application, find out if you're approved quick!
  • Redraw- Access your additional payments if you need them
  • Use the app to get loan insights to help you pay off your home loan faster

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. All products will list the LVR with the product and rate which are clearly published on the Product Provider’s web site. 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 August 11, 2022. View disclaimer.


Photo by Blissful Penguin on Unsplash



Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered. Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site. Savings.com.au, yourmortgage.com.au, yourinvestmentpropertymag.com.au, and Performance Drive are part of the Savings Media group. In the interests of full disclosure, the Savings Media Group are associated with the Firstmac Group. To read about how Savings Media Group manages potential conflicts of interest, along with how we get paid, please visit the web site links at the bottom of this page.

Latest Articles

author-avatar
Harrison is Savings.com.au's Assistant Editor. Prior to joining Savings in January 2020, he worked for some of Australia's largest comparison sites and media organisations. With a keen interest in the economy, housing policy, and personal finance, Harrison strives to deliver and edit news and guides that are engaging, thought-provoking, and simple to read.

Collections:

Be Savings smart.
Subscribe for free money newsletters.

By subscribing you agree
to the Savings Privacy Policy