Homeowners who have recently taken out a mortgage could be facing extra repayments of up to $416 a month by 2024, based on recent interest rate predictions.
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That figure is based on what a household that has borrowed 80 per cent to purchase a property at regional Australia's current median price of $551,887 would be required to repay if variable mortgage rates hit 4.7 per cent, a realistic scenario under Westpac's recent prediction of a 1.65 per cent increase to the official cash rate by March 2024.
But the mortgage hit to household budgets is expected to be felt far earlier than that.
If variable rates rise by 0.5 per cent by the end of 2022, as many economists have predicted, regional households who bought at current prices could be faced with paying an extra $121 per month if banks, as expected, chose to pass the full increase on to consumers.
Variable mortgage rates are linked to the official cash rate, as it dictates how much banks can borrow money from institutional lenders.
Reserve Bank Governor Philip Lowe conceded in early February that it is "plausible" that the official cash rate would rise this year, however many economists are using far stronger language.
Economist Saul Eslake said that recent inflation figures had led him to predict a 0.5 per cent rate rise in official rates by year's end.
"I didn't think [rates would rise in 2022] until the recent higher-than-expected Q4 inflation numbers, but now I do ... I think the RBA will likely raise the cash rate by 15 basis points, ie. to 0.25 per cent, in August and by 25 basis points, to 0.5 per cent by November," he said.
Mr Eslake said it was difficult to predict how many borrowers would be affected by changes to variable rates, with the ABS no longer publishing a breakdown of whether new mortgages were fixed or variable.
"Traditionally, most Australian mortgages have been at variable or floating rates, in contrast to the US, where almost all mortgages are at fixed rates. But fixed rate mortgages became more popular after the onset of COVID-19 when bond yields and hence fixed rates fell more than variable rates," Mr Eslake said.
Despite the potential for variable rates to rise, Mr Eslake said that stringent lending standards requiring borrowers to prove they could meet payments at 3 per cent above their current rate meant it was unlikely many homeowners would be forced to sell.
"History suggests that Australians will go to considerable lengths to avoid defaulting on their mortgages or losing their homes .. cutting other discretionary spending, and in extreme cases 'essentials', before doing that [selling]," he added.
History suggests that Australians will go to considerable lengths to avoid defaulting on their mortgages or losing their homes
- Saul Eslake
Comparison website Canstar's finance commentator Steve Mickenbeck advised mortgage holders on a variable rate to make the most of the current low rate and build a financial buffer against future rises.
"Whatever the timing of rate increases, the time for building buffers is now while interest rates are still low," he said.
"Borrowers with capacity have the opportunity to bring forward the impact of the interest rate increase by lifting their repayments ... Redraw or offset facilities give borrowers the ability to access these extra funds should they hit unexpected harder times, which can act as a buffer to deal with uncertainty," he added.
Bad news for new borrowers
Buyers trying to get a foot on the property ladder within the next two years would also suffer as a result of rising rates, according to Canstar, with new borrowers suffering a hit to their borrowing power.
If rates did rise to by 1.65 per cent, a couple with a household income of $90,000 per annum could suffer a $92,000 cut to their borrowing power, based on what they would qualify for at a 3.04 per cent and 4.69 per cent interest rate.
"When the Reserve Bank moves the cash rate up you can be sure the banks will move home loan rates up too, meaning higher loan repayments. For borrowers entering the property market or trading up, this also means the capacity of incomes becomes stretched meaning they are forced to borrow less," Mr Mickenbecker said.
New buyers react
The prospect of future mortgage rate changes is already weighing on new home buyers' minds, with some purchasers choosing the certainty of a fixed rate repayment.
They chose to take a split mortgage, with the majority of the repayment at a fixed rate which currently sits above variable rates with major lenders.
They were aware that fixed rates had been rising since late 2021, and wanted to lock in a low figure now before rates grew any further.
But they also wanted to take advantage of some of the features that are typically only available with a variable rate mortgage.
"We have a little bit of it on a variable just so we can have an offset account and pay a little bit extra off while [interest rates are] low," Mr Van Dyk said.
Mr Van Dyk said that the experience of securing finance had taught the couple to shop around and to not be afraid of negotiating with lenders.