RBA decision: Interest rate hikes pushing recent buyers to the brink as borrowers face $58,000 hit
The Reserve Bank of Australia will begin meeting today, with the market and most pundits expecting governor Michele Bullock to front the media on Tuesday and after announcing another rise in the official cash rate. It would be the third in a row – and it seems they’re already starting to bite.
New research shows a growing number of recent homebuyers are uncomfortably close to falling behind on their mortgage. Nearly one in 10 say they would be left struggling if there were two more rate hikes – a scenario the Big Four banks are predicting this year.
According to a survey from consumer comparison site Finder, 9 per cent of mortgage borrowers surveyed said they would be pushed over the edge to potential default with two more rate rises.
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As the fuel crisis deepens and pushes prices up elsewhere in the economy, three per cent of respondents said they were already on the brink, admitting they could likely only absorb one more rate hike.
“This research reveals how little buffer many households have left,” Finder’s home loans expert Richard Whitten said.
“When you consider how persistently high the cost of living has been over many years, it’s no surprise so many borrowers are nearing their limit again.”
The survey found 37 per cent of borrowers claimed four more hikes would be their limit in the household budget, while 22 per cent said they could withstand five more rate rises, and 23 per cent said they could handle six or more hikes.
Even for relatively recent buyers, you would expect most to be okay if they borrowed with a major lender as the Australian Prudential Regulation Authority (APRA) currently makes banks test whether borrowers can manage higher repayments in the event interest rates were to rise by 3 per cent, as part of bank assessments.
However new borrowers are falling behind on payments at a much higher rate. In the month of February, 0.78 per cent of new mortgage holders were 30 days in arrears, which is twice as high as the 0.39 per cent of borrowers who purchased their home earlier, according to data from the credit bureau Equifax shared with the Australian Financial Review over the weekend.
More recent home buyers “are often more vulnerable to interest rate increases and feel that mortgage stress probably more acutely just because of their debt relative to income,” S&P Global economist Erin Kitson noted to the publication.
First home buyers facing possible $58,000 blow
While the Commonwealth Bank, ANZ, NAB and Westpac are all expecting the RBA to increase the official cash rate this week, the latter is forecasting a further two 0.25 percentage hikes in June and August.
According to analysis by Canstar, someone earning the average full-time wage of $106,950 will be able to borrow an estimated $11,700 less if the RBA hikes by another 25 basis points tomorrow. That is based on a person taking out an owner-occupier loan with no other debts, no dependents and minimum expenses.
On top of the hikes already in February and May, if the Westpac prediction plays out this year, the average borrowing power of a first home buyer would be crimped by about $58,000.
“If the RBA fires off a third successive hike, Canstar estimates the average Australian would see their maximum home buying budget shrink by almost $12,000,” Canstar data insights director Sally Tindall said.
“In total, across the year the hit would tally up to over $36,000. For a couple, the damage could be double.
“The housing market hasn’t reacted evenly to the rate hikes. In Sydney, prices might have cooled but the rate hikes have pushed many home buying budgets down by more.”
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