The Reserve Bank of Australia’s (RBA) February Monetary Policy Statement showed that Australian mortgage holders have been hit harder than almost anywhere else despite the RBA hiking interest rates less aggressively than most other central banks:
Despite this, RBA assistant governor, Christopher Kent, gave a speech on Monday where he said less than half of the central bank’s 3.50% of rate hikes had been passed through to households in 2022, with a further 1.5% in higher repayments still to hit households over the remainder of 2023 and 2024.
This lag is due to the unusually high share of mortgages originated over the pandemic that were fixed rate, which will expire this year and next:
“Since last May, the average outstanding mortgage rate across all loans has increased by around 110 basis points less than the cash rate”, said Kent.
“Half of the remaining fixed-rate loans are due to roll off over the course of this year (or about 880,000 loans)”.
Accordingly, “fixed-rate borrowers face a large and delayed jump in their mortgage payments”.
“This reduction in borrowers’ free cash flows will place pressure on their budgets”, noted Kent.
Kent then provided estimates of how much further mortgage repayments will rise as these fixed rate mortgages roll-off:
“Only about 45% of the rise in the cash rate to date had passed through to total scheduled mortgage payments at the end of 2022, though slightly more will have passed through in the early months of this year”, noted Kent.
Therefore, scheduled mortgage repayments will hit a record high share of household disposable income by the end of this year based on the RBA’s current tightening.
Finally, Kent provided the below chart showing that “those with relatively new loans and on lower incomes are likely to have more modest buffers”:
The above analysis shows why the RBA would be crazy to continue hiking interest rates.
There is already significant tightening in the pipeline at the existing cash rate, and further hikes risk going too far.
