More mortgage pain likely as variable rates hit 7%

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As more mortgage holders are brought to the financial brink by last week’s cash rate increase, economists are expecting at least one more increase, and possibly more, as the Reserve Bank of Australia (RBA) tries to tame inflation.

Last week’s 0.25 percentage point rise in the cash rate to 4.1 per cent adds an extra $2269 in minimum monthly repayments on a $1 million variable rate mortgage since the RBA started increasing the cash rate in May last year.

A further two 0.25 percentage increases in the cash rate would see $2576 added to monthly repayments on a $1 million mortgage since rates started rising in May last yearCredit: Jason South

“Australia’s twelfth hike in 14 months puts many borrowers into financial territory they never thought they’d see in the life of their loan, let alone in just over a year,” says Sally Tindall, the research director at RateCity.

Debt recovery company Pioneer Credit, which has about $2 billion of unsecured credit card and personal loan debt it has bought from banks is seeing a marked increase in the amount of “non-performing” debt.

Keith John, the managing director of Pioneer Credit, says defaults on credit cards, in particular, have shot up since the start of this year as cost-of-living pressures have added to the usual triggers for credit card defaults, such as unemployment.

Pioneer Credit debt-holders on repayment plans are repaying about 3 per cent less than they were at the start of the year, he says. “That’s a meaningful decrease in a short period and shows how tough it is for consumers,” John says.

Credit ratings agency Fitch Ratings has revised the outlook for the banking sector in Australia (and New Zealand) to “deteriorating”, from “neutral”, reflecting the greater headwinds against bank earnings and asset quality.

“We forecast loan growth in Australia to slow, particularly in mortgages, as higher rates deter new borrowers, and impairment charges to rise from still-low levels as arrears pick up,” Fitch Ratings says. It does, however, expect the rate rise cycle in Australia to be close to its end.

RateCity estimates those variable rate mortgage holders who have not negotiated a lower rate from their lender or shopped around for a lower rate will be paying almost 7 per cent, once the latest rate rise flows through to their repayments schedule.

It can take up to three months before higher interest rates are reflected in repayments, depending on the bank. Tindall says many variable rate borrowers have no idea what rate increases they have started paying and which ones are still to come, making it hard to budget.

Before last week’s increase, economists at the Commonwealth Bank were expecting the cash rate to peak at 3.85 per cent, but now expect one further 0.25 percentage point increase, most likely in August, that would see the cash rate peak at 4.35 per cent.

The Reserve Bank and its governor, Phillip Lowe, have raised rates 12 times since last year.Credit: Michael Quelch

The bank’s economists had been expecting interest rates to start falling by the end of this year, but now say rates could start to fall during the first quarter of 2024.

They do not rule out a 0.25 percentage point increase in July or a 0.25 percentage point increase in each of July and August, to take the cash rate to 4.6 per cent.

ANZ economists are pencilling in one more rise of 0.25 percentage points rise, most likely in August, for a cash rate peak of 4.35 per cent, though they say the RBA may need to move rates more than once.

Figures from RateCity show if there were to be two further 0.25 per cent rises in each of July and August, someone with a $1 million mortgage would see an increase in monthly repayments of $2576 since rates started to rise in May last year.

Some with a $750,000 mortgage would see an additional $1,932 in monthly repayments.

Pioneer Credit’s Keith John says banks and debt recovery companies are motivated to help consumers get back on their feet.

He urges anyone who is struggling to keep their head above water to contact their lender. “Give yourself some peace of mind that you are dealing with it; you don’t want to be going home stressed, it’s not good for your family or yourself,” John says.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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