Are borrowers ready for this year’s rate hikes?

Mortgage rates are expected to continue rising this year as the Reserve Bank of Australia is expected to roll out two to three rate hikes and fixed-rate borrowers are likely to bear the brunt as they face higher repayments.

In a recent statement, RBA head of economic analysis department Marion Kohler said around $350bn work of loans would transition from fixed to variable rates this year.

“There are people who have more than one loan facility. You might have loans with different banks or a split with variable rate loans,” she said, adding that around 800,000 households would likely face financial pressures due to the shift.

ANZ and Westpac expect the cash rate to reach a peak of 3.85% by mid-2023.

While CBA projects a peak of 3.35%, economists from the bank recently states that a 40bps increase could be on the table, which would bring the cash rate to a conventional metric of 3.50%.

Meanwhile, NAB is expecting the cash rate to peak at 3.60% by early 2023.

Domain home loans general manager Kareene Koh said there are several ways that can help borrowers prepare for the rate hikes.

“Borrowers have digested and normalised to the interest rate environment and we’re seeing signs that there’s more confidence to work with the current market conditions instead of continuing to stand on the sidelines,” she said.

Reviewing current finances

Ms Koh said it is crucial for fixed-rate borrowers whose terms are expiring this year to reach out to their banks and lender to review their loan terms and structure.

“Understand your options between fixed and variable and research what other lenders are offering,” she said.

Building a buffer

It is also important for borrowers to start saving now to prepare a buffer for future rate hikes.

“On average, it takes three months to make the lifestyle changes necessary to adjust to new circumstances so get ready now to experience a smoother transition later,” Ms Koh said.

Factoring in future rate hikes

Given the likelihood of future rate hikes, Ms Koh said it is viral for households to include future rate hikes in their budgets.

“Many are looking into ways to save money like reviewing childcare options or how they can cut back on discretionary spending,” she said.

Refinancing

During times of rate movements, borrowers have the opportunity to explore their options to minimise the risks, especially amid rate increases.

“For borrowers who prefer the security of their current fixed home loan, re-fixing or refinancing before their fixed term ends may be beneficial.

How much would repayments increase?

Domain chief of research and economics Dr Nicola Powell said buyers who overpaid for properties in peak market conditions are feeling the pinch.

“For a household with a $1m mortgage, another rate hike of 25 basis points this month will see their total monthly repayments increase by almost $2,000,” she said.

According to Domain, here’s how much repayments would increase after the likely 25bps increase in mortgage rates this month:

Refinancing remain high, new loans still on a decline

Latest figures from Australian Bureau of Statistics (ABS) showed that the value of housing loan refinancing between lenders fell 1.5% but remained high at $19.1bn in December 2022. 

Meanwhile, the value of total new housing loan commitments declined 4.3% to $23.4bn, from record high levels seen over the earlier months 2022. Both owner-occupier and investor commitments fell. 

Housing Industry Association chief economist Tim Reardon said lending for new homes is now down by 62.4% since its peak in January 2021.

“It is concerning that this downturn to date doesn’t reflect the full impact of the RBA’s rate hiking cycle of 2022. There are significant lags between a change in the cash rate and its impact on the economy," he said. 

“The economy needs time to digest the full impact of interest rate hikes before the RBA considers further action."

Mr Reardon said there are already signs of a very significant slowdown in the economy and while the industry needs stability, the RBA would not be able to achieve such by sending the housing sector through boom-and-bust cycles.

“We don’t want to see a housing downturn gain momentum — official data on the impact of interest rates if very lagged and appears that it is much easier to strangle the economy than it is to kick start it," he said.

“This is not the same cycle we were on in the 1980s. We don’t need to crash the economy in order to save it. It took a decade to recover from the rate hiking cycles in the 80s, and this is a very different cycle."

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Photo by RobinHiggins from Pixabay.