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Mortgage rates nearing APRA’s mortgage serviceability buffer

The sharp rise in the official cash rate has seen mortgage rates pushing up towards the Australia Prudential Regulation Authority’s (APRA) mortgage serviceability buffer.

The latest hike from the Reserve Bank of Australia (RBA) took the cash rate to 2.85 per cent, which is above APRA‘s original serviceability buffer of 2.5 per cent, used before October 2021.

CoreLogic Research Director Tim Lawless said the current tightening cycle was now closing in on the current three percentage point serviceability buffer.

“November’s rate hike may leave some recent borrowers approaching uncharted waters with regards to their ability to service their loan; a situation made harder due to persistently high cost of living pressures that were unlikely to be factors at the time of origination,” Mr Lawless said.

Mr Lawless said the cash rate was now 30 basis points above the pre-COVID decade average and at the highest level since April 2013. 

“Arguably, households were far less sensitive to the cost of debt when interest rates were previously this high, with the ratio of housing debt to annualised disposable income roughly 17 per cent lower than it was in June 2022,” he said.

“If the full rate hike is passed on to mortgage rates, which is likely, the average variable mortgage rate for a new owner-occupier loan is set to reach approximately 4.96 per cent, up from the April low of 2.41 per cent. 

“Based on a $750,000 loan amount and principal and interest repayments on a 30-year loan term, the rate hiking cycle to date has added approximately $1079 to monthly mortgage repayments.”

According to Mr Lawless, the sharp increase in the cost of borrowing isn’t hitting households just yet.

“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,” he said.

“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.”

Mr Lawless said homeowners were not listing their homes dispute higher mortgage rates.

“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,” he said.

“In fact, the flow of new listings remains substantially below what they would usually be for this time of the year.”

Mr Lawless said the RBA would likely continue to raise interest rates, which presented risk to the housing market. 

“With a higher cost of debt, the outlook for housing values and property market activity remains skewed to the downside,” he said.

“Although the rate of decline in housing values has eased in some cities over recent months, we are expecting housing values to continue to trend lower until interest rates find a ceiling.”

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Rowan Crosby

Rowan Crosby is a freelance journalist specialising in finance and real estate.