It has been 12 years since the Reserve Bank’s benchmark interest rate increased and the last time it jumped by 0.25 per cent was way back in 2000, so for a lot of homeowners an increase in mortgage repayments may come as a bit of a shock.
About $500 billion in loans will also reach the end of their fixed term over the next two years which will mean all that debt will need to be refinanced at much higher rates.
According to RateCity, an increase of the anticipated 0.15 per cent on a $500,000 mortgage would increase payments by $39. If rates increase by 0.4 per cent (not likely) that would increase the payments on a $500,000 mortgage by $104 a month.
“Westpac is predicting the cash rate will rise eight times by next May, taking it to 2 per cent. If this happens, the same borrower could see their monthly repayments rise by $511 a month,” RateCity said.
A hike in interest rates will have an impact on consumption and confidence but according to ANZ Bank’s economist Adelaide Timbrell households were well placed to weather rate rises because 40 per cent of people won’t face a change in mortgage repayments if rates go up by 200 basis points (2 per cent).
“Because when rates go down not everyone reduces their payments. Also, the percentage of people with high debt and low buffers is lower than pre-COVID as at February.”
Some estimates have the number of people already experiencing mortgage stress at 1.5 million. An interest rate rise will have a significant impact of them.
But there are other impacts as well. Deposit rates will probably increase and decisions on spending will have to be made.
Every sector of the economy from retail to travel feels the impact of higher interest rates. An increase was also likely to impact the Australian dollar and that flows through to international trade.
Even renters can face possible impacts as landlords increase rents to deal with their own increased costs.
Stockbroker Wilsons said it was expected the RBA to increase rates by 0.15 per cent. That would be followed by a 0.25 per cent hike in June and again in August and November which would take the cash rate 100 basis points (1 per cent).
However, the market has been pricing in an increase to 250 basis points.
“Currently, the futures market has the cash rate peaking at around 3.5 per cent before easing back to 3 per cent in 2024,” Wilsons said.
But it added that the market was “too hawkish” at 3.5 per cent.
“High rates will likely slow the past of growth next year but recession risks remain low in our view.
“House prices have likely peaked in our view and we expect them to edge lower over the next 12 to 18 months.
“We think mortgage holders can cope with a gradual 200 basis point rise in mortgage rates over the next 12 to 18 months though there will be impacts on consumer spending and house prices.”
The increase is aimed at curbing inflation which is at 5.1 per cent. Economists expect it will increase in the June quarter, but then start to ease over the second half of the year.
Every mortgage taken out in recent years went through a stress test (or should have) so that borrowers could cope with an interest rate hike of 2.5 per cent. This was increased to 3 per cent points in 2021.
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