Interest Rate Hike: The Double Backstab

2023 kicked off with another interest rate hike after the RBA board decided on a ninth consecutive lift in ten months during their Feb 2023 meeting, taking the cash rate to 3.35%.

This is the highest cash rate since September 2012 and the Board expressed that ‘further increases in interest rates will be needed over the months ahead’ as inflation has reached 6.9%, its highest level over more than three decades.

Australian households are starting to really feel the pain on their wallets, and some are getting trapped into mortgage hell stories.

The fact that Australia’s mortgage market is boasting one of the highest rates of variable interest loans in the world (the U.S. mortgage market is dominated by 30-years fixed rate mortgage originations) means that a significant part of Aussie borrowers is more severely struck by the impact of rate hikes in rapid succession.

The double backstab

The record low cash rate level during the Covid-19 pandemic at 0.1% led existing Australian borrowers to jump on the great opportunity to fix their interest rate, often below 2%.

The relaxed borrowing rules from the prudential regulator in 2019 regarding the serviceability calculator buffer (eased to stress-test debts only 2.5% above the prevailing interest rate) enabled borrowers to service higher amount of liabilities and take on more debt.

''The cash rate is very likely to remain at its current level until at least 2024''

There is little doubt that borrowers got the necessary reassurance to engage into more debt after the RBA governor Philip Lowe announced that ‘the cash rate is very likely to remain at its current level until at least 2024’ in March 2021.

The issue therefore arises as the cash rate has increased by 3.25% while borrowers’ borrowing capacities were assessed with a 2.5% buffer.

It is easy to anticipate that many households who had enjoyed a couple of years of ‘low fixed interest rate mortgages’ will end up in a distressing situation when their fixed term expires and will be hit the reality of the current interest rate market.

The situation only compounds to the burden of the current living cost crisis.

As about one out of five home loans taken during the pandemic will be rolling off a fixed rate in 2023, there is no doubt that mortgage brokers will be very active refinancing loans and providing a bit of fresh air to underwater households.

E.R

Photo by Andrea Piacquadio