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Cash rate: Grim sign interest rate pain isn’t over for mortgage payers


The Reserve Bank of Australia (RBA) has kept the official cash rate (OCR) on hold at 4.10 per cent since June. Barring a major upside surprise in the economic data, this likely represents the peak in official interest rates.

The RBA can take comfort in the fact that there remains a significant amount of monetary tightening ‘built in’ to the system owing to the large number of fixed-rate mortgages that are yet to convert to variable rates.

As illustrated in the next chart, an abnormally high share of mortgages originated at fixed rates over the pandemic:

These fixed-rate mortgages have expired en masse over 2023, converting from ultra-low rates of around 2 per cent to variable rates of around 6 per cent.

Recent estimates by CBA put the value of fixed-rate mortgages that expired in the six months to 30 June 2023 at $34 billion, with another $52 billion worth of fixed-rate mortgages forecast to expire over the six months to 31 December:

Australian borrowers have only felt around two-thirds of the 4.0 per cent of the OCR hikes, according to CBA.

However, that number is predicted to rise to around 85 per cent by the end of the year as more borrowers convert their fixed-rate mortgages to variable.

Separate analysis from Macquarie Group senior economist, Justin Fabo, shows that the, “RBA cash rate has risen 400 bps, but (as at July) the weighted-average rate on outstanding variable-rate owner-occupier home loans in Australia had risen ‘just’ 337 bps. For all outstanding home loans, the rise was 278 bps.”

By mid-2024, once the bulk of the pandemic fixed-rate mortgages have expired, CBA estimates that Australian households will spend around 10 per cent of their disposable income on debt servicing costs, which will be easily the highest share on record:

As a result, average interest rates paid by Australian mortgage holders will continue to rise as fixed-rate mortgages expire.

This reduces the need for the RBA to lift interest rates further to slow the economy.

Mortgage stress will continue to rise

The RBA’s statement accompanying last week’s interest rate decision acknowledged that the impact of rate rises on Australian households is uneven, “with many households experiencing a painful squeeze on their finances, while some are benefiting from rising housing prices, substantial savings buffers and higher interest income.”

Variable mortgage rates have more than doubled since the RBA first began hiking interest rates in May 2022, which has lifted principal and interest mortgage repayments by around 50 per cent.

Roy Morgan’s latest mortgage stress survey shows that 29.2 per cent of owner-occupied households with mortgages are now in stress, the highest share since May 2008 when the OCR was 7.25 per cent:

Roy Morgan says it uses “a conservative model, essentially assuming that all other factors remain constant”.

Therefore, mortgage stress will inevitably rise as more borrowers switch from fixed to variable rates.

Moreover, if Australia’s unemployment rate rises in line with the RBA’s forecast – i.e. from its current rate of 3.7 per cent to around 4.5 per cent late next year – then mortgage stress will worsen even further.

Recession risks are building

Last week’s June quarter national accounts release from the Australian Bureau of Statistics (ABS) showed that the Australian economy fell into a per capita recession following two consecutive 0.3 per cent declines in per capita gross domestic product (GDP).

This decline in per capita GDP was caused by a contradiction in household consumption, with real per capita household disposable income declining by 0.2 per cent over the year to June:

The situation facing Australian households and the economy will only worsen from here given average mortgage repayments will continue to rise as large numbers of fixed-rate mortgages expire and revert to variable rates, as explained above.

Households also face an extended period of real income cuts as wages fail to keep pace with inflation.

Given the above conditions, the RBA was justified in keeping interest rates on hold last week.

There is already substantial monetary tightening ‘built-in’ owing to the fixed-rate mortgage reset. This will ensure more interest rate pain for households and further dampen consumption spending and the economy.

Leith van Onselen is co-founder of and Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

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Joanna Swanson

Joanna Swanson is Europe correspondent at the Thomson Reuters Foundation based in Brussels covering politics, culture, business, climate change, society, economies and inclusive tech. With specific focus in breaking news, she has covered some of the world's most significant stories.