While many homeowners are facing increased mortgage costs, many households are well placed to weather further interest rate rises.
Many recent borrowers remain on low, fixed mortgage rates: the latest upswing in housing values saw an unusually high incidence of fixed-rate lending. The portion of housing finance secured on fixed-rate terms (including refinancing) peaked at 46 per cent in August 2021, up from about 15 per cent prior to the COVID-19 pandemic, according to the Australian Bureau of Statistics.
Borrower assessments take potential rate rises into account: mortgage serviceability assessment buffers were increased from 2.5 per cent to 3 per cent by the Australian Prudential Regulatory Authority from November 2021. This means people who took out a new home loan over the past nine months should be able to absorb rate rises 3 percentage points higher than the variable rate at the time their mortgage was initiated.
Increased savings: the pandemic period saw consumers make large contributions to their offset and redraw accounts. In June the median owner-occupier borrower with a variable rate loan had a buffer equivalent to about 18 months of prepayments. So as variable rates rise most borrowers may have significant savings to draw on.
Wage growth: as of July, the Australian unemployment rate was 3.4 per cent, the lowest level since August 1974. The tight labour market is gradually feeding through to higher wages with average earnings per hour up over 5 per cent in the year to March.
While affordability indicators around mortgage serviceability may deteriorate further in the coming quarters as interest rates rise, these factors should help households cope with the rising cost of mortgage repayments.
It is also worth noting serviceability may improve in 2024 when ANZ expects the RBA to begin cutting the cash rate. ANZ economists forecast the RBA will cut the cash rate by 50 basis points by the end of 2024.
While the year ahead presents the challenges of rising interest rates, the deposit hurdle and value to income ratio affordability metrics should show broad improvement through the housing market downswing
Felicity Emmett is a Senior Economist at ANZ and Eliza Owen is Head of Australia Research at CoreLogic.