Interest rate rises: Australian homeowners face huge hikes

Interest rate rises are now inevitable but there are concerns one group of homeowners in particular are facing huge difficulties as a $400 billion problem looms.

Hundreds of thousands of Aussies are facing a “huge cliff” as up to $400 billion worth of fixed interest rate mortgages expire over the next few years – just as multiple interest rate hikes are set to hit, according to experts.

With consumer prices hitting an annual rise of 5.1 per cent, which is the biggest in more than 20 years, analysts have predicted that interest rates could be increased as early as next month.

Three of the big four banks have forecast that the Reserve Bank of Australia will introduce its first rate rise in 11 years in May, after it sat at a record low of 0.1 per cent during the pandemic.

Some experts have predicted that interest rates could hit 2 per cent in just a year’s time.

People will be watching Philip Lowe, Governor of the Reserve Bank of Australia, and its decision making. Picture: Jeremy Piper/NCA NewsWire

However, banks haven’t waited for the RBA decision with the National Australia Bank lifting rates on its four year loans from 1.98 per cent to 4.79 per cent in the past year, RateCity.com.au found.

Housing expert Professor Hal Pawson from the University of New South Wales (UNSW) said if an average mortgage of $600,000 was slugged by a 3 per cent interest rate rise, it would mean repayments would rise by a whopping $1500 a month or more.

“There’s going to potentially be a huge cliff in two or three years’ time when their fixed-rate loan runs out because they’ll have to refinance,” he told The Guardian.

Last year, analysis from the UNSW found that 12 electorates in particular showed the majority of households were under financial stress – a situation that was likely to be further exacerbated by interest rate rises.

12 electorates in particular have been struggling financially, UNSW research found. Picture: Gaye Gerard/NCA NewsWire

The electorates identified were Werriwa, Greenway, Macarthur, Chifley, Fowler, Sydney and Hume in NSW, where households were considered to be in financial stress if they only had less than 5 per cent of their income left after paying for normal expenditure, including housing.

Other electorates were in Victoria in McEwan, La Trobe, Scullin and Calwell, as well as Pearce in Western Australia.

Prof Pawson said most of the owners from these electorates would have bought near the top of the market and would unlikely to have received pay rises to buffer some of the financial pain.

Borrowers who had also had a child, changed job or been impacted by Covid lockdowns could be hardest hit by rate rises, alongside anyone who had overstretched themselves to get into the market.

RateCity has predicted households with an average $500,000 loan would see an increase of $513 in monthly repayments by May 2023.

Sally Tindall, a senior researcher at RateCity, said rate rises will come on top of the soaring cost of living, including rising food and petrol prices.

“There’s going to be some households that really have to take a long hard look at their budgets, and potentially make hefty cuts in numerous places to just keep their heads above water and their mortgage repayments up,” she told The Guardian.

”We’re looking down the barrel at not just one rate hike in isolation. There’s going to be multiple hikes.”

A whole load of mortgages are coming up for refinancing. Picture: Getty Images

Andrew Walker, chief executive and founder of digital lender Nano, said that $400 billion worth in fixed rate mortgages with the major banks would be rolling off into a variable interest rate in the next couple of years.

He said he expected many Aussies will be looking to refinance, although some Aussies could find it difficult if they owe more than 80 per cent of their loan.

“We’re sitting on the edge of the cliff of the fixed rate roll over. The Commonwealth Bank of Australia alone is expected to have a whopping $53 billion of fixed rate mortgages rolling over into variable rates in the second half of 2023,” Mr Walker said.

“Assuming the other major banks mirror the same structure as the CBA, we could expect to see $400 billion in fixed rate mortgages rolling off into a variable interest rate in the next couple of years.

“If market expectations of rising rates are correct, these will be significantly higher, leading to a sharp lift in repayments.”