Tiny interest rate rises would put millions of Australians on struggle street

With interest rates on housing still hovering at all-time lows, it is worrying to think of what would happen if rates were to suddenly spike higher.

That is no longer a far-fetched scenario with bond market traders and many economists warning that inflation could surprise on the upside, forcing the Reserve Bank to hike official interest rates earlier and higher than expected.

We have effectively already seen that happen with the RBA suddenly giving up its stated target of 0.1% for three-year bonds without notice.

It is now not so hard to see the same thing happen to the “no rise in the cash rate until 2024” should circumstances around inflation change.

The thing about central bank changes to combat inflation is that you never know where they will end – interest rate settings will be changed to fight inflation first, so rates need to go to the level where they will work – not to the level that most people will be comfortable with.

Research shows people can’t tolerate much of a rate rise

That is a worrying thought given that recent research shows that many recent entrants to the property market would struggle to meet even a small increase in interest rates, particularly after lengthy COVID-19 lockdowns.

More than half of people surveyed by research firm McCrindle said they would consider refinancing their mortgage if repayments increased by $300 a month.

Of course, if rates in general have gone up, even refinancing may not be able to provide much relief from higher repayments.

That sort of lift in repayments would flow from a 1% rise on a loan of $572,000 and much earlier for larger loans, which have become very common given lower home loan rates.

Carried out on behalf of the Finance Brokers Association of Australia, the research is particularly poignant given the recent rise in fixed interest rates which has had the effect of making more conventional floating rate housing loans the cheapest on the market but also much more sensitive to changing rates.

Fixed rates rising, causing more to choose floating rate loans

Earlier this year, each of the major banks had two-year fixed mortgage rates below 2% while five-year loans could be locked in for under 2.25%

Since then, fixed rates have increased by up to 0.75%, with financial markets betting that the RBA will need to raise rates by the middle of next year rather than waiting until 2024.

The higher chances of rising interest rates was one of the causes of the Australian Prudential Regulation Authority (APRA) requiring lenders to test the ability of borrowers to handle a 3% rise in repayments.

The survey found 57% of more than 1,000 people said they could not afford “at all” a $300 a month increase.

Among those with a gross weekly income of between $2,000 and $3,000, 46% surveyed said they would struggle to meet such an increase.

Single parents, remote workers the most sensitive

Single parent families (80%), those with a weekly income of between $700 and $1,200 (76%) and those in remote areas (71%) said they could not meet a $300 monthly increase.

Finance Brokers Association of Australia managing director Peter White said Australians could have grown complacent as it had been 11 years since there had been an increase in official interest rates.

“Many Australians are clearly on the brink and are sleepwalking into disaster, living in the false hope that rates will stay this low,” he said.

“This survey is a wake-up call and shows that even a small rise in rates – which is looking more likely next year with rising inflation – could be catastrophic for our nation.”

Victorian borrowers the worst hit

The reasons for such sensitivity to interest rates were made clear in the recent Victorian statistics that showed that local living standards have fallen for two consecutive years.

That was the biggest slump in the country and followed on from lengthy pandemic lockdowns, with most of the indications being that it could take another year for living standards to recover to pre-pandemic levels.

Gross state product per capita – a key measure of living standards – fell another 0.4% in 2020-21, following on from a 1.9% drop in 2019-20.

Victoria the worst with back-to-back falls

Victoria was the only state to suffer back-to-back falls in GSP per capita, with the Victorian population also falling.

The long lockdowns smashed household spending on hospitality, which fell 27%, while transport spending was also well down as people worked from home.

Household spending by Victorian consumers is now back to where it was in 2016-17, pointing to a long and extended recovery.

The numbers would have been much worse if not for a massive rise in government spending, which climbed by almost $15 billion since the start of the pandemic.