While there is a general sense of resilience among home loan borrowers as rate hikes approach their full swing, many would still feel a significant impact on their finances, particularly fixed-rate borrowers who took advantage of the low-rate environment in recent years.

Reserve Bank of Australia Deputy Governor Michele Bullock said the extremely low interest rates on fixed-rate products through 2020 and 2021 resulted in the share of housing credit on fixed mortgage rates increasing from 20% at the start of 2020 to a peak of nearly 40% in early 2022.

“The majority of currently outstanding fixed-rate loans are due to roll off within the next two years, with the greatest concentration of loans due to expire in the second half of 2023,” she said.

With the assumption that all fixed-rate loans roll onto variable mortgage rates and new variable rates rise by around 300 basis points (broadly informed by recent market pricing to mid-2023), around half of fixed-rate loans would face an increase in repayments of at least 40%.

“Borrowers with fixed-rate loans that are due to expire by the end of 2023 would experience a median increase of around $650 or 45% in their monthly repayments. This is slightly more than the rise in payments that variable-rate borrowers would experience over this time,” Ms Bullock said.

Households in “fairly good” position

While experiences among different borrower groups would be varied, Ms Bullock said households, as a whole, are in a fairly good position as rate hikes continue. She cited three factors that indicate the resilience in the household sector:

1. Balance sheets are in good shape

Ms Bullock said while households have high levels of debt, the strong gains in house prices over 2021 and early 2022 has boosted the asset values for many homeowners.

“Furthermore, households have saved a large amount of money since the onset of the pandemic –around $26bn. These savings have been put into redraw facilities as well as offset and deposit accounts,” she said.

There was a considerable government support provided to households during the pandemic, as well as the payment assistance provided by banks in the form of deferrals.

“Even though expenditure on goods increased, households were still spending less than they were prior to the pandemic. As a result, the household saving rate rose sharply and many households therefore built-up large liquidity buffers, including those households with mortgages,” Ms Bullock said.

2. Strong lending standards

Ms Bullock said the strength of lending standards in recent years also provide confidence in the ability of many households to absorb some increase in interest rates.

“For many years, banks have been required to stress test new borrowers' ability to meet repayments with interest rates that are significantly higher than the rate on the loan they have applied for,” she said.

In October 2021, lenders increased the serviceability buffer to a minimum of 3 percentage points. As a result, many borrowers should have some spare servicing capacity built into their financial margins.

3. Built-up equity

The household sector has accumulated sizeable equity due to the robust growth in house prices over the recent years, benefitting borrowers with existing mortgages.

On top of this, the share of new borrowers that have borrowed at high loan-to-valuation ratios has declined markedly.

“The combination of these factors meant that the share of loan balances in negative equity was around 0.1% in May 2022, down from around 2.25% prior to the pandemic,” Ms Bullock said.

“While housing prices have started falling in recent months, they would have to fall a fair way for negative equity to become a systemic concern.”

Even if house prices are to decline by 10%, the share of balances in negative equity would only rise to 0.4%, still lower than its peak of 3.25% in 2019.

Should prices hit a 20% decline, the share of balances in negative equity would only be at 2.5%.

“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.

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