Despite doom and gloom headlines about rising interest rates and the increased cost of living, data from the Reserve Bank of Australia reveals many Australian mortgage holders are well-placed to absorb further interest rate rises.
In their April Financial Stability Review, the RBA noted many Australian households had used the pandemic to channel savings into mortgage offset and redraw accounts.
As a result, homeowners with variable-rate loans had a median 21-month buffer on scheduled repayments in February this year, compared to 10 months’ worth at the start of the pandemic.
The RBA’s analysis was conducted when interest rates were at a historic low of 0.1 per cent, prior to successive cash rate rises in May (0.35 per cent) and June (0.5 per cent).
Their predictive modelling worked on the basis that interest rates could increase 200 basis points to 2.1 per cent.
“If interest rates were to increase by 200 basis points, current excess payments would be equivalent to just under 19 months of scheduled payments,” the RBA continued.
And these additional payments have been made by a large proportion of Australian households.
The RBA noted 60 per cent of all borrowers currently have variable-rate loans, with around two-thirds of these being owner-occupiers.
Almost two-thirds of these owner-occupied variable rate loans have recorded higher buffers since the start of 2020, with around 70 per cent increasing their buffers by six months or more.
“More broadly, around three-quarters of owner-occupier variable-rate loans currently have excess payment buffers of at least three months, compared with around two-thirds at the start of the pandemic,” the RBA found.
The RBA’s analysis is supported by Australia’s largest lender, the Commonwealth Bank, which recently released research indicating more than 90 per cent of Australian homeowners had taken steps to mitigate the impact of rising mortgage rates.
They found:
- close to half (47 per cent) reduced their living costs
- 42 per cent built up their savings, and
- almost two-fifths (38 per cent) had been making additional repayments on their home loan to get ahead.
Their research also found that 37 per cent of Australians had been putting money into their offset/redraw account and a third (33 per cent) had been looking for cheaper providers for utilities/services.
“We know that one in two CommBank customers are more than three months ahead of their home loan repayments and it’s encouraging that the majority of Australian homeowners are taking proactive steps to continue to improve their financial position with rates expected to continue to increase over the next 12-18 months,” CommBank’s Executive General Manager of Home Buying, Dr Michael Baumann, said.
These savings will likely be needed, with RBA Governor Dr Philip Lowe telling the ABC’s 7.30 Australians needed to be prepared for both higher interest rates and inflation that could hit 7 per cent by the end of this year.
Dr Lowe said it was reasonable to assume interest rates would rise to 2.5 per cent “at some point”, while inflation could peak as high as 7 per cent by December and is unlikely to start falling until the first quarter of next year.
Dr Lowe vowed the RBA would do whatever was necessary to tackle inflation and return it to the target rate of 2 to 3 per cent.
“It’s unclear at the moment how far interest rates will need to go up to get that,” Dr Lowe said.
“I’m confident that inflation will come down over time but we’ll have to have higher interest rates to get that outcome.”
Based on the RBA analysis in April of what a 200 basis point rate rise would mean to variable rate mortgage holders, the RBA found:
- just over 40 per cent of these borrowers made average monthly payments over the past year that would be large enough to cover the increase in required repayments.
- a further 20 per cent would face an increase in their repayments of no more than 20 per cent.
- around 25 per cent of variable-rate owner-occupiers would see their repayments increase by more than 30 per cent of their current repayments; however, around half of these borrowers have accumulated excess payment buffers equivalent to one year’s worth of their current minimum repayments that could therefore help ease their transition to higher repayments.
- the share of borrowers facing a debt servicing ratio greater than 30 per cent (a commonly used threshold for ‘high’ repayment burdens) would increase from around 10 per cent to just under 20 per cent.
