That makes the analysis of fixed rate movements even more interesting.

Whilst we saw the Reserve Bank of Australia (RBA) start it’s phase of rate increases in mid-2022, the fact remains that the fixed rates offered by our banks had already been increasing for around 6-8 months, starting in late 2021. This is because the Australian banks fund their home loan books from a mix of domestic deposits (ie:  from the money we place in savings accounts here in Australia) and then borrowing they need from overseas markets.  The cost of overseas market borrowings, particularly for longer term debt, was increasing so the banks passed that on via increasing their fixed rate offerings to us mortgage holders.

When the RBA doubled down on this with increases to it’s own official cash rates we saw a savage reaction from the Australian Banks. Whilst the variable rates generally went up in line with movements from the RBA, the fixed rates in some cases lunged upward in excess of 1.00% in anticipation of the further rate increases to come.

Economists were largely divided as to whether the banks had gone too far too early with their fixed rate increases.  The fact that roughly one third of Australia’s banks and mortgage lenders at some stage made downward adjustments to their fixed rate offerings suggests that, at least for some of them, it is indeed the case.

As is always the case, each interest rate increase by the RBA brings you one step closer to the rate peak and we have seen much of the recent debate change from how many more rate increases are still to come – to when they might even start decreasing. Rate decreases, when they start and how quickly they go down will primarily be determined by 3 factors:

1. The cost to the banks of their overseas funding
2. Whether the RBA becomes comfortable that Australia’s rate of inflation is under control, and
3. If Australia does in fact fall into recession.

Nobody has the crystal ball, even the RBA themselves who have a very unfortunate and well publicised recent track record with regard to rate forecasts. So the banks and markets do their own analysis and react accordingly. This has seen some lenders reacting to the most recent RBA rate hike in what us mortgage holders might think is a strange way.

What do I mean by strange?

Well lets looks at Suncorp’s reaction to the latest RBA rate increase on the 8th of February…………

                Variable               ↑           0.25%    (in line with RBA increase of 0.25%)
                Fixed 1yr              ↓           0.40%
                Fixed 2yr              ↓           0.41%   
                Fixed 3yr              ↓           0.51%   
                Fixed 5yr              ↓           0.20%   

And they are not alone, similar adjustments have been made other Australian banks and mortgage lenders.

So why?

It is simply a reflection that Australia’s banks believe we may be closer to the peak of rate increases than not and, particularly if Australia ends up in recession, the next major move in interest rates could in fact be downward.

As always, any home loan rate decision you make should take into account not only your own opinions of where rates might be heading, but also your personal circumstances. It is an important decision that should be made with the guidance of a professional, ideally an MFAA accredited Mortgage Broker.

Source:  Mick Doyle, Accountplan Finance Solutions

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A surge home loan pain would also see Australian borrowers experiencing the tightest budget pressures in a decade.

NAB has forecasted mortgage rates to increase by 2.25 percentage points by September 2023, which would see an average Australian household with a $600,000 home loan owe their bank another $700 a month, Daily Mail Australia reported.

Tapas Strickland, NAB’s director of economics, said interest payments as a share of household income would rise to the highest level since September 2012, with interest payments, across all borrowers, predicted to increase from the current 4.4% of household income, to 7.9%.

This would see mortgage repayments as a proportion of take-home pay climb above the post-Global Financial Crisis average of 7% and well above the pre-pandemic level of 5.7%. 

“While it is clear the household sector will be able to service a higher mortgage rate, a rise in interest payments relative to income of 3.5 percentage points will have to be financed by a reduction in saving and/or lower consumption than otherwise unless the economy remains very strong and wages growth accelerates considerably,” Strickland told Daily Mail Australia.

CoreLogic data showed that Australia’s median property price was at $718,146 in January, following a 22.4% annual increase, which was the fastest pace in 32 years.

Home prices in capital cities and regional areas are also growing at 10 times the level of wages.

Factoring in a 20% deposit, a borrower paying off a typical Australian home would need to pay the bank $574,517.

An owner-occupier with this kind of mortgage, with a still-low 2.39% variable rate, would have monthly repayments of $2,238. Should variable rates rise to 4.64%, as predicted, monthly repayments on a mid-priced Australian home would grow by $721 to $2,959 – marking a 32% increase in just 18 months.

Wages in 2021, however, only saw a 2.3% increase despite the ban on skilled migrants from moving to Australia until December, with pay level growth stuck below the long-term average of 3% since mid-2013.

Wages in the private sector grew by 2.4%, compared with 2.1% for public sector employees, according to the Australian Bureau of Statistics for the December quarter. 

Sarah Hunter, KPMG senior economist, said the latest wages growth data was still below the RBA’s preferred level before it raised rates. 

Wages are also well below the 3.5% inflation rate.

“At the moment the average worker is experiencing declining real wages,” Hunter told Daily Mail Australia. “Although markets expect tightening to begin imminently, momentum in wage setting and price inflation means we expect the RBA to wait until the second half of the year August or possibly later, in the fourth quarter, before pulling the trigger.”

The Reserve Bank of Australia cut the cash rate to a record-low of 0.1% in November 2020, following the national COVID lockdowns, and RBA Governor Philip Lowe last year repeatedly said it would stay there until 2024 at the earliest. 

But NAB is predicting rates will hit 0.5% by the end of 2022 and 0.75% by the March quarter of 2023.  

Even with rates at low levels, an average, full-time earner on a $90,329 salary with a $574,517 loan already has a debt-to-income ratio of 6.4 – that is already considered to be at a dangerous level by the Australian Prudential Regulation Authority, where a borrower would struggle to pay their mortgage and bills.

Since November, APRA has required the banks to model a borrower’s ability to cope with a three-percentage-point increase in mortgage rates, up from 2.5 percentage points previously, Daily Mail Australia reported.

Source: BrokerNews

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Bluestone Home Loans has released its Home Loan Affordability Index for December quarter, revealing the index fell to 93.8 in December 2021 quarter compared to 82.9 in the December 2020 quarter.

The latest result is also 1.2 points higher than the November quarter figure of 92.6 and above the long-term average of 87.0 – which reflects a higher proportion of the average income is required for the average home loan.

Indeed, the boom in house prices has significantly increased the average loan size required by buyers, as wage growth remains stable, fueling the “sharp fall” in affordability.

The Affordability Index has now tracked above the long-term average over seven rolling quarters to December 2021, and although the index eased over October following six consecutive rises this reflected the “transient impact of COVID restrictions”.

While every state saw a calendar year decline in home loan affordability, at the December 2021 quarter, it was NSW and Victoria that were the least affordable states after Victoria fell 18.5 per cent and NSW saw a decline of 17.4 per cent.

Queensland, which saw record house price rise and migration over the year, also felt the pinch of a fall in affordability of 12 per cent, slightly behind was Tasmania that dropped 11 per cent, and the ACT that dropped 8.2 per cent.

Among the other states, South Australia experienced a decline in affordability of 6.7 per cent, while the Northern Territory dropped 7.5 per cent, followed by Western Australia at 2.8 per cent.

Commenting on the latest trends, economist for Bluestone Home Loans, Dr Andrew Wilson, said the strong home price growth over 2021 resulted in buyers borrowing more to keep pace with markets and, with subdued incomes growth and flat interest rates, this resulted in a higher proportion of buyer incomes required for loan repayments.

“Although home loan activity increased sharply again over December following November’s spike in activity, the late year revival reflects a catch-up from the restrictive impact on housing markets of severe spring coronavirus lockdowns – particularly in Sydney, Melbourne and Canberra,” Dr Wilson said.

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“Last year’s runaway increase in prices is already moderating as stricter lending conditions from financial institutions place a ceiling on borrowing capacity.

“This has the effect of sidelining buyers, resulting in reduced demand and lower prices growth in the year ahead.”

When looking at higher-priced housing markets, such as Sydney and Melbourne, Dr Wilson said they continue to record a decline in home price growth levels as a consequence of falling affordability reducing buyer activity and the satisfaction of pent-up demand.

According to CoreLogic’s home value data in January, house price rises in Sydney (up 0.6 per cent) and Melbourne (0.2 per cent) were marginal compared to the rest of the state, with Brisbane increasing 2.3 per cent and Adelaide up 2.2 per cent in house prices.  

Dr Wilson said as Brisbane and Adelaide continue to report strong home buyer activity, this will act to offset overall home lending declines. Although, national volumes are set to be lower than the record levels of 2021. 

Looking ahead at owner-occupier and first home buyer loan activity in 2022, he said it will also “likely be lower” than the record levels reported last year.

“But, we expect investor activity – which remains below the average of its long-term total residential loan market share – to continue to rise,” Dr Wilson said.

While the boom in house prices may dip later this year, he said the outlook for the housing market in 2022 remained positive, supported by recovering local economies, an easing of COVID constraints, as well as the resumption of high levels of migration and continuing low-interest rates.

Source: MortgageBusiness

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