Fixed-rate mortgage holders yet to feel pain of higher rates – and that could mean bad news for the rest of us

The Reserve Bank’s aggressive increases in interest rates will take longer than normal to have an economy-wide impact because a record number of Australians have taken out fixed-rate mortgages, one of the institution’s assistant governors has warned.

Chris Kent, in an address in Sydney on Monday, said he believed many of the more than 1 million households whose fixed-rate mortgages will reset to higher interest rates this year and beyond have yet to change their spending habits.

Christopher Kent says the full impact of higher interest rates on the economy will take longer due to the high proportion of people with fixed-rate mortgages.Credit: Bloomberg

The bank has lifted official interest rates at its past 10 board meetings, taking the cash rate from 0.1 per cent at the start of last May to 3.6 per cent. Markets, until recent turmoil across the European and American banking systems, had expected the bank to keep lifting the cash rate to 4.1 per cent.

On an average mortgage of $604,000, the rate rises so far have increased monthly repayments by more than $1100.

But during the COVID-19 pandemic, a record number of Australians fixed their mortgages at ultra-low rates. The RBA estimates almost 600,000 fixed mortgages rolled off their low rates last year and another 880,000 are due to roll off this year, with 450,000 more due in 2024.

Kent said ordinarily the increases in interest rates would feed more quickly into the economy due to the high proportion of borrowers with variable-rate mortgages.

The surge in fixed-rate mortgages through COVID-19 meant the impact, on inflation and the broader economy, would be slowed.

“The lagged effect of the cash flow channel of monetary policy is likely to be somewhat elongated currently due to the high proportion of fixed-rate loans and sizeable buffers held by many borrowers,” he said.

“This means that it’s likely to take longer than usual to see the full effect of higher interest rates on household cash flows and household spending.”

The Reserve Bank and Treasury have noted that people increased their savings levels throughout COVID-19, providing a financial buffer to offset the impact of higher interest rates.

But Kent noted there was a good chance many people on fixed-rate mortgages had yet to change their spending patterns, even though they would soon face a sharp increase in their monthly repayments.

“I suspect many fixed-rate borrowers do not adjust their spending in advance, but rather wait until they roll onto the higher rate,” he said.

“Even those that are more forward-looking are likely to make moderate adjustments at first, with further adjustments required at the time of the switch.”

Kent admitted fixed-rate mortgage holders would ultimately feel the full impact of higher rates.

“As those fixed-rate loans reset at a higher interest rate, borrowers will be faced with a sizeable jump in their required mortgage payments,” he said.

“This reduction in borrowers’ free cash flows will place pressure on their budgets – in addition to that associated with the burden of high inflation – and require an adjustment of their spending and/or saving behaviour.”

Kent said the increase in interest rates through 2022 had lifted mortgage repayments by about 1.1 percentage points of total household disposable income. He said by 2024, there would be a further lift of 1.5 percentage points in the hit to household income from higher rates.

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