Borrowing costs to climb in 2024 even without rate hikes, Reserve Bank says

The rolling expiry of hundreds of thousands of ultra-cheap fixed-rate mortgages means there is further pain to come, RBA analysis reveals.

The rolling expiry of hundreds of thousands of fixed-rate mortgages over the past year has meant only three quarters of the RBA rate rises since May 2022 have hit home. Picture: NewsWire / David Crosling

The continued expiry of ultra-cheap pandemic-era fixed home loans means average mortgage rates will climb by a further 0.35 percentage points this year even without any further official hikes, new Reserve Bank analysis has revealed.

As hopes for an RBA rate cut this year fade, the new research suggests that the massive spike in borrowing costs that has helped smash consumption over the past year will only become more painful for as many as a quarter of a million households through 2024 as they move on to more expensive variable loans.

A record number of borrowers fixed their mortgages for 2-3 years at rates of 2-2.5 per cent during the height of the Covid-19 health crisis, as the RBA flooded the banking system with free money and drove the cash rate down to 0.1 per cent.

The share of fixed-rate home loans almost doubled during this period, from about 20 per cent of outstanding housing credit leading up to the pandemic, to a peak of nearly 40 per cent in early 2022, according to an article by RBA economist Benjamin Ung in the central bank’s latest Bulletin publication.

“While the pace of fixed-rate loan expiries has slowed, there remains a substantial share of low rate fixed-rate loans – around 35 per cent of the stock of fixed-rate loans that was outstanding in December 2022 – that will expire over 2024,” Mr Ung says in his article.

“This will contribute to a further increase in the average outstanding mortgage rate as these fixed-rate borrowers transition to much higher prevailing interest rates than they are currently paying,” he says.

The massive take-up of fixed mortgages during the pandemic explains why only 3.21 percentage points, or 76 per cent, of the 4.25-ppt increase in the cash rate since May 2022 has been passed on to the average outstanding mortgage rate.

This pass-through rate is substantially lower than the 90 per cent recorded during previous rate-hike cycles in 2006 and 2009, Mr Ung notes.

The higher prevalence of fixed rate loans and increasing competition have played a part, as banks offered cash-backs of as much as $5000 to lure new borrowers amid the frenzy of refinancing that followed the Covid-19 period.

Despite the slower pass-through of RBA hikes to mortgage interest rates, monetary policy has still been effective, and the rise in the outstanding home loan rate during the tightening cycle has been larger than in comparable countries such as the US, New Zealand and Canada, where fixed mortgages are typically more common.

The mortgage burden may have increased by less than might have been expected historically, but it has still lifted by a substantial amount and to record levels as Australians took out ever larger loans during the pandemic property price boom.

Scheduled home loan payments - including principal and interest - soared to 10 per cent of household disposable income at the end of last year, against about 7 per cent leading up to the pandemic.

This debt repayment burden will climb to 10.5 per cent by the end of 2024, Mr Ung says.