Mortgage rates close to the upper end of APRA’s mortgage serviceability buffer

Citing ongoing concerns about inflationary conditions, and the potential for tight labour markets to fuel further domestic inflation, the RBA continued along its less aggressive path of rate hikes in November, lifting the cash rate a further 25 basis points to 2.85%.

The cash rate is now 30 basis points above the pre-COVID decade average and at the highest level since April 2013.

Effects of this another rate hike

Arguably, households were far less sensitive to the cost of debt when interest rates were previously this high, with the ratio of housing debt to annualised disposable income roughly 17% lower than in June 2022.

If the full rate hike is passed on to mortgage rates, which is likely, the average variable mortgage rate for a new owner-occupier loan is set to reach approximately 4.96%, up from the April low of 2.41%.

Based on a $750,000 loan amount and principal and interest repayments on a 30-year loan term, the rate hiking cycle to date has added approximately $1,079 to monthly mortgage repayments.

The cumulative 2.75 percentage point rise through the tightening cycle –since May takes home loan rates above the 2.5% serviceability buffer that was used before October 2021 and close to the current 3 percentage point serviceability buffer.

November’s rate hike may leave some recent borrowers approaching uncharted waters with regard to their ability to service their loan; a situation made harder due to persistently high cost of living pressures that were unlikely to be factors at the time of origination.

With unemployment around generational lows, and forecast to remain well below average levels, it is unlikely mortgage arrears will rise materially despite the higher cost of debt and high inflation.

However, it is likely borrowers will pull back on non-discretionary elements of their spending in order to maintain their debt repayment obligations and pay for essentials like food, fuel and utilities.

What's ahead?

Although interest rates are rising at the fastest pace since the early 1990s, we aren’t seeing any signs of panicked selling or forced sales appearing in our monitoring of listings data.

In fact, the flow of new listings remains substantially below what they would usually be for this time of the year.

The RBA notes interest rates are likely to rise further from here.

With a higher cost of debt, the outlook for housing values and property market activity remains skewed to the downside.

Although the rate of decline in housing values has eased in some cities over recent months, we expect housing values to continue to trend lower until interest rates find a ceiling.

About Tim Lawless Tim heads up the Core Logic RP Data research and analytics team, analysing real estate markets, demographics and economic trends across Australia. Visit www.corelogic.com.au