The big four banks have released alarming forecasts of interest rate hikes, with borrowers expecting multiple hits this year.
Big banks have confirmed homeowners’ worst fears – changing their forecasts to signal an interest rate hike much sooner, after the shocking rise in the cost of living was unveiled earlier this week.
While the Reserve Bank of Australia’s (RBA) previous stance had been to keep interest rates on hold until 2023, data showed the cost of living hit a 22-year high of 5.1 % year over year in March.
That has left the RBA no choice but to hike rates multiple times this year, experts say, with the first hike expected for homeowners in 11 years.
Three major banks are planning an interest rate hike next Tuesday.
ANZ, NAB and Westpac both predicted a 0.15% rise in early May.
Commonwealth Bank also forecast a 0.15% rise but for June, although there were chilling warnings that interest rates could hit 2.5% in total by the end of the month. year.
ANZ’s prediction would see the current record high interest rate drop from 0.1% to 0.25%.
There would also be a further 0.25% hike to be achieved in June, which would quickly bring the interest rate to 0.5%, according to the bank.
“Inflationary pressures have grown and widened. A cash rate target of 0.1% is inappropriate in this context,” ANZ’s economics team said.
“We don’t think the RBA needs to wait for more wage data, given that its own linkage program indicates that wage growth continued to accelerate in the March quarter.”
ANZ economics chief David Plank added that the case for the first hike in June was “weak” and he expects the RBA to be forced to make its first rate hike in over a decade next month.
NAB forecasts a series of rate hikes, the first at 0.15% in May and a further increase of 0.25% in June, July, August and November.
This would see interest rates hit a whopping 1.25% by the end of the year.
The major bank said the cost of living data “exceeded” its expectations as well as the RBA’s latest February forecast.
“Temporary factors continue to play a role in the stronger inflation outcome, but core inflation is expected to remain elevated in the second quarter alongside further declines in the unemployment rate and strengthening wage growth” , NAB analysts said.
Westpac chief economist Bill Evans originally thought the RBA would suspend an interest rate hike in May as the RBA had previously signaled it wanted to see additional data before making a call, but on Friday he said she would have to move out next month.
He estimated a 0.15% increase in May, followed by increases of 0.25% for the rest of the year.
He thinks interest rates will hit 1.5% by the end of 2022 and the RBA will only refrain from being more aggressive with its hikes due to high household debt.
The calls for a hike in June
The CBA took a more cautious approach with the forecast of a 0.15% rise in June, although Australian economics chief Gareth Aird believes the RBA is likely to hike rates next week.
“If the RBA lifts the cash rate at the May board meeting next week, it will have gone back on what it said last week – that the board agreed that it would take into account evidence of both inflation and changes in wage costs as it sets policy,” Mr Aird said.
The big bank also forecast a rise of 0.25% in June and July.
However, some economists have gone even further than the big banks in predicting that the interest rate could climb to 2.5% by the end of the year.
At this rate, average homeowners could pay an extra $1,000 a month to pay their mortgage if the forecast for a 2.5% rate hike holds true.
For borrowers with an $800,000 mortgage, this would add an additional $1,100 per month in repayments and $1,298 per month for a $1 million mortgage.
At the smallest, that would mean $779 more for monthly repayments on a $600,000 loan.
For 2023, forecasts have been made for interest rates to skyrocket to 3.4% by the middle of the year.
Big financial stress
It comes as nearly two-thirds of Australian borrowers believe they will face ‘serious financial stress’ if the interest rate on their home loan rises to 5%, according to the latest research from comparison website Mozo, which could happen with variable rates.
Considering the current average floating rate of 3.03% and the increases planned by some of the major banks, this would push interest rates up to almost 5%, according to Mozo.
His research also showed that more than half of borrowers have not stress-tested their ability to repay their monthly mortgage payments at a higher interest rate, while 8% believe that any increase in rates will affect them. would put you in a serious financial situation.
“With the last cash rate increase over 11 years ago, many borrowers will never have seen interest rates rise on home loans, so it’s no wonder many people are worried about the impact it could have on their finances,” Mozo spokesman Tom Godfrey said. .
“It’s never too late to test your ability to make repayments at higher interest rates. Something as simple as putting your home loan amount into a mortgage calculator to see what your repayments might look like as rates rise can help you budget and reduce stress.
Mozo also found that 59% of homeowners are worried about losing home equity due to falling house prices.
“Losing the equity in your home could become a problem if you’re forced to sell or refinance, but if you’re able to hold on, continuing to pay down your principal is one of the best safeguards you can put in place. “said Mr. Godfrey. mentioned.
The RBA predicted that a 2% rise in rates would reduce house prices by about 15%.
Currently, the best variable home loan rates in Mozo’s database are from online lenders, with Reduce Home Loans’ prime rate at 1.79%.
However, the big four banks are still offering variable rate loans averaging 2.14%, compared to three-year fixed loans of more than 4%, RateCity found.
Its database also showed 32 lenders that had at least one homeowner variable rate below 2%.
Once in a lifetime increases the value of homes
But leading mortgage broker Louisa Sanghera, founder of Zippy Financial, said many mortgage holders would be sheltered from rate hikes due to the huge rise in house prices.
“For some borrowers, this may be their very first rate hike – but many of those same homeowners have also experienced one-time increases in the value of their homes or investment properties over the past year. past year,” she said. mentioned.
“That means their overall net worth has put them in a much better position than if they had never bought due to an unrealistic fear of interest rate hikes, which are an integral part of monetary policy, n ‘let’s not forget.’
She predicted a 0.25% rise in interest rates over several months.