Millions of Australian home owners are facing yet another rise in their mortgage bills, with the Reserve Bank widely expected to raise interest rates again on Tuesday.
About $832 has already been added to monthly mortgage bills for a $500,000, 25-year loan paying principal and interest, since the cash rate has risen from a record low in May 2022.
That figure will jump to $908 on Tuesday, according to RateCity, with the RBA slated to take interest rates to a decade-high 3.35 per cent with another 0.25 percentage point increase.
A typical mortgage bill will have risen by $11,700 in 12 months, according to Mozo.
Economists are predicting the squeeze will get even worse, with the RBA expected to pass on further hikes this year after inflation ended last year at a peak of 7.8 per cent annually.
“After the 25-basis point move in March there will be scope for a pause in April, to await the March-quarter inflation report,” Westpac chief economist Bill Evans says of the rate outlook.
BIS Oxford head of macro-economic forecasting Sean Langcake said that while inflation has likely peaked, it will remain higher than the RBA is comfortable with for an extended period.
“We still expect disinflation this year, but there’s probably a bit more fuel on the fire that will keep inflation higher for longer,” he said.
Households refinance en masse
Amid those forecasts, home owners are being urged to refinance to avoid the worst of the mortgage bill hit, with cut-throat competition between major banks driving a surge in cashback offers and discounted rates.
About $19 billion worth of home loans were refinanced in December, according to ABS data published on Friday, up 18 per cent annually and only slightly below record levels in November.
There are still more people who could be on a better deal, with Mozo personal finance expert Claire Frawley pointing out that the average rate on new loans is 4.79 per cent, 0.50 percentage points below the outstanding average rate for existing variable home loans.
“Home loan customers shouldn’t just sit back and watch their variable rate increase. They need to be proactive,” Ms Frawley said.
“Lenders often have lower interest rates to attract new customers, so borrowers need to take charge.”
Mortgage cliff overdone?
However, many home owners are unable to refinance because they locked in fixed rates during the pandemic, when the cash rate target was nailed to the floor at 0.10 per cent.
The RBA estimates more than $350 billion worth of mortgages that are currently fixed will roll over onto market rates in 2023, affecting more than 800,000 loan facilities.
Some commentators have suggested this represents a “mortgage cliff”, however Mr Langcake said that narrative has been overdone, arguing many households rolling onto market rates are well prepared for what is to come.
“They have a sense of what the changes in variable rates mean,” he said.
“Most people seem to have taken the gains from being fixed and put it into pre-paying their mortgages and building up buffers.”
Nevertheless, Mr Langcake said there would be a marked effect on consumption when fixed rates began rolling over to much larger variable rates – which is what the RBA wants to see.
Property prices to fall further
Rising interest rates will also continue to pressure household wealth, with PropTrack figures on Tuesday predicting property prices will fall by another 7 to 10 per cent in 2023.
The forecasts, which assume another two 0.25 percentage point rate hikes in 2023, come after house prices continued falling in January, albeit at a slower pace than last year.
“With borrowing costs continuing to rise and the subsequent reduction in borrowing capacities, property price falls are likely to continue and accelerate in 2023, with the more expensive cities likely to see the largest price falls,” PropTrack director of economic research Cameron Kusher said.
