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.


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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 December 1, 2023. View disclaimer.

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