How prepared are we for interest rate increases?

The RBA’s Deputy Governor, Michele Bullock, delivered a speech this week on the topic of how increases in interest rates will affect households. Despite the media’s negative opinion that interest rate hikes are causing significant mortgage stress on households around the country, the RBA’s outlook is that most home loan borrowers are in a good position to weather the rises. Their reasoning is based on:

  • The introduction of more prudent lending standards in recent years, such as an increase in the interest rate buffer to three per cent, meaning borrowers are better prepared for the impact as buffers allow for it
  • If rates rise by three per cent by mid-2023 (indicated by recent market pricing), data shows that one-third of mortgage owners are already making payments at that level
  • Due to the increased government support and limited opportunities for spending during the height of the pandemic, households have built up significant savings buffers, with half of variable owner-occupier borrowers accumulating sufficient savings to service current payments for the next two years
  • Strong growth in housing prices over the past couple of years has significantly increased household equity. Small declines recently have made little dent in this.

The negative impacts would be predominantly felt in instances where borrowers are highly geared, such as first home buyers who purchased at the top of the market with a minimum deposit, and who are currently only paying the minimum repayment. These individuals will experience a 40 per cent repayment rise based on projections. Those coming off previously very low fixed rates – most of which convert to variable in the second half of 2023 - will experience a slightly higher rise of around 45 per cent. 

BDO’s opinion is not to panic, but to adequately prepare. If it is possible for your situation, we encourage you to budget for repayments as though they are already at a higher rate. The benefits of this preparation are :

  • It will provide a buffer against future interest rate shocks
  • You will be building payments in advance
  • You will save interest while you’re repaying more than required.

If you haven’t already done so, we recommend that you review your variable rate and contact your bank if it’s out of market range. Most banks are open to negotiating on variable rates to retain your business. If you need assistance with this, our BDO Advisers can help.

There are also some great incentives to refinance, including low variable rates, cashbacks ranging from $2,000 to $6,000 and other incentives. Contact your local BDO Adviser to find out more.

To read the full speech, head to the RBA website.

Marie Ryan is an authorised credit representative 519653 of BDO Corporate Finance Ltd (ACN 010 185 725) Australian Credit Licence 24551

Your full financial needs and requirements need to be assessed prior to any offer or acceptance of a loan product.

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