The days of Australian borrowers being able to bear the effects of repeated interest rate increases will soon be over, according to Australia’s second-largest bank.
If the Reserve Bank’s recent rate rises are passed on in full by the banks, the variable mortgage rate will crawl towards the 3-point serviceability buffer, placing pressure on mortgage holders.
At its most recent meeting, the RBA decided to lift the cash rate by 25 basis points to 2.85 per cent, the highest since 2013 and 30 basis points above the pre-covid decade average.
Despite increasing the rate since May, the RBA expects to increase the interest rate further in coming months as it tries to slay inflation that is forecast to peak at 8 per cent this year.
Westpac CEO Peter King said despite repeated increases, the bank is not yet seeing a rise in hardship or stressed assets.
“Many customers built up savings during the past two years and 68 per cent remain ahead on their mortgage repayments,” he said.
“However, it is inevitable that the impact of higher rates will be felt, including when borrowers’ low fixed-rate loans are rolled over.”
If the whole rate rise is carried on to mortgage rates, which is anticipated, the average variable mortgage rate for a new owner occupier loan will be around 4.96 per cent, up from 2.41 per cent in April. The rate hike cycle to far has added about $1,079 to monthly mortgage repayments based on a $750,000 loan amount and principle and interest instalments over a 30-year loan period.
The combined 2.75 percentage point hike since May pushes house loan rates over the 2.5 per cent serviceability buffer used prior to October 2021 and close to the current 3 percentage point serviceability buffer.
Australian Prudential Regulation Authority (APRA) increased the minimum interest rate buffer it expects banks to use when assessing the serviceability of home loan applications to “reinforce the stability of the financial system”.
CoreLogic Research Director Tim Lawless said November’s rate hike may leave some recent borrowers approaching uncharted waters with regards to their liability to service.
“A situation made harder due to persistently high cost of living pressures that were unlikely to be factors at the time of origination,” he said.
“With unemployment around generational lows, and forecast to remain well below average levels, it is unlikely mortgage arrears will rise materially despite the higher cost of debt and high inflation. However, it is likely borrowers will pull back on non-discretionary elements of their spending in order to maintain their debt repayment obligations and pay for essentials like food, fuel and utilities.
“Although interest rates are rising at the fastest pace since the early 1990s, we aren’t seeing any signs of panicked selling or forced sales appearing in our monitoring of listings data. In fact, the flow of new listings remains substantially below what they would usually be for this time of the year.”