Higher-than-expected inflation will spell more pain for mortgage holders with the Reserve Bank of Australia likely to lift interest rates by a quarter of a percentage point at its meeting next Tuesday, taking the rate to 3.35 per cent.
Martin North, the founder of Digital Finance Analytics, not only expects the RBA to lift the cash rate on Tuesday but predicts it will lift the cash rate again in May. If his forecast is correct, an additional 446,000 households will fall into ‘severe’ risk of mortgage stress, up from 262,000 now.
More households will be at “severe” risk of mortgage stress as the RBA continues increasing interest rates.Credit:Jason South
That will include many first-time buyers who bought when property prices were at or near their peak during late 2020 and into 2021 and are on fixed interest rates of less than 2.5 per cent, and will revert to a much higher variable rate when their fixed term ends.
Inflation figures released by the Australian Bureau of Statistics last week showed that prices grew 7.8 per cent during 2022, with a 1.9 per cent rise in the December quarter, higher than economists were expecting.
A 0.25 percentage point increase on February 7 would take the typical variable mortgage interest rate to about 6.2 per cent from about 2.9 per cent in April last year, just before the RBA started its rate-rising cycle.
“It makes sense for borrowers who are struggling to have a robust conversation with their lender; they should plan ahead, they cannot just wait and hope that is going to work out,” North says.
North is expecting rates to remain on hold after an increase in May. Even though rates are likely to start coming down in 2024, they are only likely to come down half a percentage point or one percentage point. “We are likely to see higher rates for longer,” North says.
Figures from RateCity show a 0.25 percentage point increase in the cash rate in February would cause an increase in the monthly repayments of $1816 on a $1 million mortgage compared with May last year.
Effie Zahos, editor-at-large at Canstar, says a new wave of financial distress will be felt by homeowners who are coming off fixed rates.
“If homeowners can manage their household finances to accommodate one more rate hike they may find that with the peak of inflationary pressures behind them, the RBA could hold off on further rate hikes giving homeowners some much-needed reprieve,” Zahos says.
Pete Wargent, co-founder of buyers’ agent BuyersBuyers, says while the peak of the interest rate cycle is likely getting close, for some first home buyers the pain will become too great, and they will choose to sell this year to relieve the financial stress.
However, it is not all doom and gloom. He says banks are allowing some borrowers to go on to interest-only terms, or even have a pause on repayments as banks have no “appetite for forced sales and repossessions”.
Wargent says, on the plus side, we have full employment, and job vacancies are high with opportunities for some to work extra hours if needed. “Most people who decide to hang on will probably be able to do so,” he says.
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- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. Investors should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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