RBA cash rate: A terrifying $900-a-month ‘cliff’ faces Australians when fixed-rate loans end

Many Australians who bought homes during the pandemic are about to wake up very abruptly as they face an impending ‘cliff’.

Australians who bought a home during the pandemic are expected to face a mortgage ‘cliff’ – adding up to $900 to their monthly repayments – when their fixed rate loans end.

As the cash rate was at an all-time low of 0.1% as of November 2020, many borrowers were able to secure fixed mortgage rates below 2% that year.

Almost half of all new loans – 46% of them – were fixed rate loans in July 2020.

However, there are now concerns about what will happen when these fixed terms end.

RateCity research director Sally Tindall said a significant number of households would break out between July and December next year, describing the situation as an impending mortgage “cliff”.

“Our estimate is that 38% of people are currently on a fixed rate,” Tindall said, citing a RateCity study that found $131 billion in fixed rate mortgage terms from Commonwealth Bank, Westpac and National Australia Bank would finish in the second half of 2023.

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RateCity said if someone with a $500,000 loan took out a fixed rate mortgage in July 2020 for 1.94% (the average fixed rate at the time), they would currently be paying $2,105 in monthly repayments. .

However, when their fixed rate ends in July 2023, RateCity calculated that they would face an average ‘return’ rate of 5.68%, based on Westpac’s forecast for the official exchange rate.

This would drive up repayments by $937 per month. Even on the lowest estimated variable rate of 4.42%, monthly repayments would increase by $600.

When rates could fall further

A bigger-than-expected rise in cash rates this week surprised many, but not everyone is rocking the rises to continue over the long term.

The Commonwealth Bank (CBA) released a report this week that predicts what the RBA will do to fight inflation over the next few years.

Bank experts say “talking about a recession is premature.”

“Economic booms cannot last forever,” they said. “But not all booms are followed by recessions. We expect Australia’s current economic boom to last a little longer and the labor market to remain tight, so we don’t expect a recession.

“But growth momentum is expected to slow significantly through to the end of 2022 due to a rapid and aggressive RBA tightening cycle.”

Australians got a taste of this “aggressive tightening” this week when the RBA hiked rates by 0.5%.

At 0.85%, the official exchange rate on Tuesday rose to its highest level since September 2019 and marked the first consecutive rate hike in 12 years. Before the announcement, experts thought the rise would be closer to 25 or 40 basis points.

Due to the bigger-than-expected rise, ABC experts have adjusted their forecasts for what’s to come.

“We now expect a further 50 basis point rate hike in July, followed by 25 basis point hikes in August, September and November, which will see the cash rate target at 2.10% by the end of the year. end of 2022,” they said. “The risk is a higher year-end cash rate of 2.35% that could occur with a 50 basis point hike in August.”

However, they said they don’t expect any further rate hikes in 2023. In fact, they believe rates will be cut in the second half of 2023.

They say this because they predict that a sharp rise in interest rates will cause the economy to slow down.

“We expect economic momentum to slow significantly under the weight of tight monetary policy in 2023,” they said.

“As such, we expect to see policy easing on the agenda in H2 (the second half of) 2023. We have forecast 50 basis points of rate cuts in H2 2023.”

The bank appeared to criticize the aggressive rate hikes – calling them a “very brutal tool” to address some of the supply issues in domestic and global economies that are currently contributing to higher inflation.

“Higher tariffs will not put downward pressure on the local price of electricity, gas, oil or food,” he said.

“These items are non-discretionary and their price increases affect all households, especially those at the lower end of the income scale.

“This does not mean that rates should not be normalized because the labor market is tight and wage growth will increase.

“But the medium-term big picture is absolutely paramount and there are other levers that can and should be pulled by policymakers to address some of the supply-side issues, particularly around gas and electricity. ‘electricity in Australia.’

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