A stark warning has been issued claiming that mortgages in Australia could rise by more than 50% if the futures market is correct. With households already struggling with soaring living costs and interest hikes, this prospect will cause a lot of worry and create huge issues if it comes to fruition.
Like other central banks around the world, the Reserve Bank of Australia has been taking aggressive action with monetary policy tightening in a bid to bring rocketing inflation back under control. For those with variable rate mortgages, this has resulted in increased repayments when finances are already stretched. Ongoing rate hikes will put further pressure on those with home loans.
In April, the base rate stood at just 0.1%, a record low. However, in just a few months, rates have been hiked to 1.85%, and with inflation continuing to soar, there are more rate hikes on the cards.
The average discount variable mortgage rate has increased from 3.45% in April to 5.2%. As a result, the average monthly repayment for a mortgage has increased by 23% compared to April. This equates to a monthly repayment increase of $514 for a homeowner with a $500,000 mortgage on a variable rate.
Bank will be taking further steps to normalise monetary conditions
While the rate hikes implemented so far have already taken their toll on household finances, the central bank has made it clear that further steps will be taken to ‘normalise monetary policy’.
The bank described the most recent 0.5% rate hike as “a further step in the normalisation of monetary conditions in Australia”. It also said, “The Board expects to take further steps in the process of normalising monetary conditions over the months ahead.”
Further data shows there has been a drop in consumer sentiment, which is now close to recessionary levels. In addition, house prices are falling at the fastest pace since the early 1980s. Wage growth continues to be slow, and consumer spending is also slowing down.
Alongside the economic slowdown, further inflationary pressure is expected due to housing and energy.
Divided views on OCR
There are divided views over how far the central bank will continue to increase interest rates. Forecasts from CBA, AMP, and NAB suggest that the OCR will peak at 2.6%, while ANZ and Westpac predict it will peak early next year at 3.25%. According to the futures market, OCR will peak at 3.75% by the middle of next year.
No matter which of these predictions is correct either would severely impact Australian mortgage borrowers’ finances. Many would see a considerable hike in repayments, and the average discount variable mortgage rate could rise to between 5.95% and 7.10% depending on which of the predictions is correct.
This could then mean a rise in monthly mortgage repayments of 34% based on CBA, AMP, and NAB forecasts. Based on the futures market forecasts, repayments could increase by 51%.