Australia could see fastest increase to loan repayments in history
Economists are warning Australian borrowers to prepare for a mortgage shock from what could be the fastest increase to loan repayments in history.
Homeowners with a $750,000 mortgage will be paying an extra $1,200 per month to service their loan if rates rise to 3.1% by the middle of 2023, The Australian reported. The national quarterly mortgage interest bill is set to spike by $8 billion this year, hitting a record $19 billion by December.
If rates, which started the year at 0.1%, rise by three percentage points in 18 months – a scenario laid out recently by Reserve Bank deputy director Michelle Bullock – repayments on a $500,000 loan would rise from $2,355 per month in January to $3,159 per month by June 2023, The Australian reported.
Monthly repayments on a $750,000 mortgage would rise from $3,533 to $4,738, while repayments on a $1 million loan would rise from $4,711 to $6,317.
Judo Bank economic advisor Warren Hogan told The Australian that he expected the RBA would deliver a third consecutive 0.5-percentage-point rate hike to 1.85% in August. However, he said that the central bank then needed to slow the pace of its hikes.
“They need to pause to give themselves a couple of months to see how the economy is reacting,” Hogan said. “What they have done so far is utterly appropriate, but now is the wrong time to continue to jack up rates by 50 basis points at every meeting. If rates get to three to 3.5% by the end of this year, there’s probably a better-than-even chance of having a shallow recession in early to mid-2023.”
Hogan estimated that if rates hit 2.6% by the end of the year, households would be paying a total of $18.9 billion in mortgage interest by the December quarter – a 75% spike from a year earlier, The Australian reported. That would surpass the previous quarterly mortgage bill record of $17.8 billion in September 2011.
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It would also set a record for the biggest annual increase in interest payments, surpassing the previous record of 57% in 1974, The Australian reported.
“The difficulty in understanding how consumer discretionary spending will respond is the fact we haven’t had episodes of very strong upwards rates movements for such a long time,” KPMG chief economist Brendan Rynne told the publication. “The last time this occurred (in the early 1990s), household balance sheets were significantly less stretched than today. What we have done over the past two decades is load up on debt on the basis of very low interest rates. What we have now are very high levels of debt, which means we will be much more sensitive to interest rate rises.”
