Australian borrowers are most at risk of mortgage stress

Australian borrowers are now facing a 65 percent increase in their monthly mortgage rates as ultra-low fixed rates begin to wind down – much to the Reserve Bank’s concern.

The RBA this month left the spot rate on hold at an 11-year high of 3.6 percent.

But with inflation still well above the target of 2 to 3 percent, both the Commonwealth Bank and Westpac expect another rate hike that would bring inflation to 3.85 percent in May. ANZ now expects that rate hike to be delayed until August.

Ultra-low fixed mortgage rates, below 2 percent, will expire in the coming months, abruptly forcing borrowers into much higher “revert” variable rates — which could rise to 7.18 percent, should there be one more RBA rate hike.

A borrower with an average $600,000 mortgage would see his monthly payments rise 65 percent to $4,163 — an increase of $2,518 — if he didn’t refinance, RateCity calculated.

Variable-rate borrowers have seen their monthly repayments rise 48 percent to $3,415 since May last year — up from $2,306 when the RBA money rate was still at a record low of 0.1 percent.

This happened when the Commonwealth Bank loan rate, for those with a down payment of at least 20 percent, rose from 2.29 percent to 5.52 percent.

While floating-rate borrowers have seen their budgets squeezed, the RBA’s Financial Stability Review for April was more concerned about the 880,000 fixed-rate borrowers whose ultra-low interest rates expire in 2023.

“On some measures, fixed-rate loans seem a bit riskier than floating-rate loans,” it said.

“Fixed-rate borrowers generally have larger balances relative to the borrower’s income and higher loan-to-valuation ratios than floating-rate loans.”

The Reserve Bank of Australia said fixed-rate borrowers also had “less time to build equity or liquidity buffers.”

“Some fixed-rate borrowers may be at greater risk of going into financial stress if their mortgage payments rise,” it said.

The Reserve Bank calculated that 14 percent of borrowers would run out of savings by mid-2024 without cutting their “non-essential” spending.

But 9 percent of borrowers would use up their savings anyway “even if they cut their non-essential spending by “relatively extreme amounts” — or by 40 to 80 percent.

Australia is facing its worst cost-of-living crisis since 1990.

Inflation reached a 32-year high of 7.8 percent in 2022.

Although the monthly data for February moderated to 6.8 percent, headline inflation is still well above the RBA target of 2 to 3 percent.