Aussies’ savings to shield heavy impacts of likely rate hikes

A potential rate hike this year is not likely to cause significant stress to Australian home loan borrowers.

ANZ senior economist Felicity Emmet said Australians have strong buffers that could help them weather rate hikes.

“Higher household savings rates of 10-22% since COVID began have provided many households with strong liquidity buffers coming into 2022,” Ms Emmet said.

“Home owning households are more likely to have bigger liquid buffers, which can be drawn down if needed to service mortgages at higher interest rates.”

Furthermore, the likelihood of wage growth this year is also expected to offset rate increases for many Australian households.

Interest costs likely to stay manageable

Ms Emmet said while the cash rate is expected to increase by the end of 2023 to 2% — which is higher than the range in 2019 at 0.75% to 1.75% — Australian households are likely to spend slightly less in interest costs.

“However, interest is only one part of the mortgage payment for most borrowers, particularly after earlier regulatory tightening of interest-only loans,” she said.

Still, the higher average new loan sizes pose a risk to some households if tightening materially raises mortgage payment costs.

In fact, the average owner-occupier loan was around $550,000 in December 2021, up 12% from December 2020 and 21% from December 2019.

First-home buyers, however, could be at risk.

The average first-home buyer loan was $481,000 in December 2021, up 11% from the same period in 2020.

Furthermore, there were 21% more first home buyer loans in 2021 than 2020, and 43% more in 2021 than annualised 2019 data.

“More new first home owner loans, which tend to have higher loan-to-value ratios and debt-to-income ratios, pose some risk as interest rates rise. Recent first home buyers are also far less likely than other buyers to have strong liquidity buffers,” Ms Emmet said.

Will there be further tightening in lending rules?

Late last year, the Australian Prudential Regulatory Authority (APRA) lifted the interest rate serviceability buffer from 2.5% to 3%. This move reduces the maximum borrowing capacity by as much as 5%.

Ms Emmet said despite this and the recent increases in fixed rates, housing finance still bucked the downtrend in the earlier months of 2021 to record rises in November and December.

“Previous episodes of macroprudential tightening and loosening have been almost immediately apparent in the housing finance data, so the recent strength in housing finance is surprising, particularly in light of rising mortgage rates,” she said.

However, these further changes to serviceability and rate hikes would likely drive down housing finance in the coming months.

“While it’s still possible that APRA steps in with further measures, we expect them to be quite narrowly focussed on loans that are both high debt-to-income and high loan-to-valuation,” Ms Emmet said.

“If, however, housing finance proves to be more resilient than we expect, then further and broader measures, like another increase in the buffer, would become more likely.”

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