Higher interest rates are now inevitable, but there are fears that one group of homeowners in particular is struggling as a $400 billion problem looms.
Hundreds of thousands of Australians face a ‘massive slope’ as their $400 billion fixed-rate mortgage loans expire over the next few years
According to economists, multiple hikes in interest rates are set to occur. With consumer prices rising annually by 5.1 percent, the largest rise in more than 20 years, analysts have predicted that interest rates could rise as early as next month.
Three of the big four banks expected the Reserve Bank of Australia to deliver its first rate hike in 11 years in May, after settling at a record low of 0.1 percent during the pandemic.
Some experts also expected interest rates to reach 2 percent within one year.
However, the banks did not wait for the decision of the Reserve Bank of Australia, as the National Bank of Australia raised interest rates on its four-year loans from 1.98 per cent to 4.79 per cent last year, according to RateCity.com.au.
Professor Hal Pawson, a housing expert from the University of New South Wales (UNSW), said that if the average mortgage of $600,000 was affected by a 3 percent rate hike, that would mean payments would rise by $1,500 per month or more. more.
“There will probably be a huge slope in two or three years when their fixed rate loan runs out because they will have to refinance,” he added.
Last year, an analysis from the University of New South Wales found that 12 voters in particular showed the majority of households were under financial stress – a situation that was likely to be exacerbated further by higher interest rates.
Families were considered financially stressed if they had less than 5 percent of their income left after paying for normal expenses, including housing.
Prof Pawson said that most owners of these constituencies would have been buying near the top of the market and were unlikely to receive wage increases to ease some of the financial burden.
Borrowers who have also had a child, changed jobs or been affected by the Covid lockdown may be hardest hit by the price hike, along with anyone who has struggled to enter the market.
RateCity predicts that households with an average loan of $500,000 will see an increase of $513 in monthly payments by May 2023.
The higher prices will come on top of the higher costs of living, including higher prices for food and gasoline, says Sally Tindall, senior researcher at RateCity.
“There are going to be some families who will have to take a hard look at their budgets, and potentially deep cuts in many places to keep their heads above water and their mortgage payments,” she added.
Andrew Walker, CEO and founder of digital lender Nano, says $400 billion worth of fixed-rate mortgages at major banks will convert to variable interest rates in the next two years.
He said he expected many Australians to look forward to refinancing, although some Australians might find it difficult if they owe more than 80 per cent of their loan.
“We are sitting on the edge of the rolling fixed rate slope. The Commonwealth Bank of Australia alone is expected to receive $53 billion in fixed rate mortgages converting to variable rates in the second half of 2023.
Assuming other major banks mirror the same CBA structure, we can expect to see $400 billion of fixed rate mortgages roll into a variable rate in the next two years.
“If market expectations of higher interest rates are correct, these will be much higher, leading to a sharp rise in repayments.”