In the aftermath of the recent cash-splash budget, it is not a secret that home loan rates are expected to begin soaring as early as June.
As a result, many Australians are scrambling to lock in low rates now before they become a thing of the past. This comes as no surprise as home loan rates have been at historic lows for some time now.
However, the latest paper from the Royal Bank of Australia finds that 90% of fixed-rate borrowers with loans expiring in the next 2 years may have their repayments substantially increase by 20 per cent. Ultimately this jump is an effect of just a 200 basis points increase in interest rates.
Economists anticipate that this will affect $89 billion for home loans set to expire on or before 2023. In fact, 25 per cent of these loans can witness interest rate rises of up to 30 per cent.
As a result, the total number of borrowers currently under mortgage stress in Australia could increase from 10 per cent to 20 per cent.
Interest Rates At Pre-Pandemic Levels
Many fixed-term home loan rates are already higher than their pre-pandemic levels, with the average rate of fixed-rate home loans at 3.27 per cent p.a. for loans spanning more than 3 years. By considering the fixed-rate hikes over the past few weeks, this average is set to clock new highs.
Come June, interest rates may soar well beyond the tipping point and cause house prices to fall by 15 per cent.
Recent home buyers will be the hardest to hit as RBA prepares for a home loan rate increase in more than a decade. With the last rate hike way back in November 2010, many real estate experts opine that millions of homebuyers in Australia are not prepared for the rate rise.
Graeme John, Head of Growth at Joust, explains, "There's a real disconnect between how much people think rates will rise by and how much they actually will.
We've seen many people who have come to us in the last few weeks trying to lock in rates before they rise any further. And it makes complete sense as this opportunity may not come back anytime soon."
The Double-Edged Sword of Inflation And Rising Mortgages
Households already burdened with debt should brace themselves for a difficult time later this year owing to rising inflation. With higher mortgage payments, fuel prices, increase in rents, and food prices, many will have to make some lifestyle changes and cut down on spending.
Recent estimates show that inflation for essential goods and services double wage growth. So, to make ends meet, many will have to cut down on their discretionary spending, which can further act as a drag on economic growth.
Insulation With Fixed Rates
Many borrowers have been smart to protect themselves from rate hikes by fixing their mortgages. Around 50 per cent of the loans given out last year have been fixed.
At the same time, this may not be a long term solution to the issue at hand. As soon as the fixed-rate mortgages roll off, borrowers will need to refinance their loans at much higher interest rates in the next 1 or 2 years. This may cause another set of borrowers to enter into mortgage stress.
A Vicious Cycle?
The rise in interest rates will hurt many, but it is necessary to bring the economy back on track.
Still, it makes one wonder about the nature of home loans and how they can affect lives at a granular level.
For instance, about 70 per cent of home loans approved in Sydney last year have been fixed for 3+ years.
After the upcoming rate hikes, it is possible for a substantial portion of those borrowers not even to be eligible for their existing home loan amounts had they been applying in the upcoming quarter.
This makes a case for regulators to increase restrictions around risky lending, as many home loans may be on the brink of going bad with the upcoming interest rate hike.
How Joust Can Help
On the borrower's front, Joust can indeed come as a breath of relief for borrowers looking for competitive interest rates for their home loans.
Joust is a digital mortgage marketplace that helps homeowners uncover the best home loans for their specific profiles and needs. Assisting borrowers to get access to multiple home loans at the least possible interest rates helps borrowers save thousands of dollars, making them better equipped to handle unprecedented interest rate hikes.