Reserve Bank interest rates: Mortgage repayment shock expected
Home buyers are being warned to prepare for “repayment shock” as rising inflation pressures force the Reserve Bank to consider delivering the largest one-off interest rate rise in two decades amid signs the economy is being buoyed by increasingly profitable businesses.
The head of the Australian Prudential Regulation Authority, Wayne Byres, said on Tuesday the unexpected emergence of inflation pressures and higher interest rates would have a “significant impact” on borrowers, especially with house prices expected to fall.
Mortgage sizes swelled to record levels through the COVID pandemic as interest rates were slashed and consumers – unable to leave the country – sank money into the property market. The average new mortgage in NSW has reached $800,000 while in Victoria it is at $650,000.
The Reserve Bank started lifting interest rates in May, taking them to 0.35 per cent in what was the first increase in rates since 2010. Financial markets and the bank expect rates to continue increasing in a bid to bring inflation, currently at 5.1 per cent, under control.
The bank is expected to lift rates by at least 0.25 percentage points at its meeting next Tuesday with financial markets and some economists tipping a 0.4 percentage point jump. Such an increase would be the largest one-month lift since it pushed up rates by half a percentage point in early 2000.
Byres, speaking in Sydney, said the Australian economy was “entering a very different environment”, and the regulator was closely watching mortgage-holders on fixed rates that will be due to expire soon and people who took on mortgages many times the size of their annual income.
“The faster-than-expected emergence of higher inflation and interest rates will have a significant impact on many mortgage borrowers, with pockets of stress likely, particularly if interest rates rise quickly and, as expected, housing prices fall,” he said in a speech to the Australian Financial Review Banking Summit.
“Of particular note will be residential mortgage borrowers who took advantage of very low fixed rates over the past couple of years, and may face a sizeable ‘repayment shock’ (possibly compounded by negative equity) when they need to refinance in the next year or two.”