• Robert Baharian

Here's The Impact of Rising Rates on Borrowers

I think we're over the coldest time of the year, thank goodness. I love summer. The warm mornings, glorious days, and warm evenings, aircon breezing through the house, and the chirping of crickets in the evening. Oh, and how can we forget the tennis - the Australian Open. It can be such a fast paced game, especially when you watch some of the best in the world. The closer you get, there is so much action going on, left, right, backward, forward, slipping and sliding, backhands, forehands, volley, half-volley, it's actually crazy how athletic these guys and gals are at the top level. Sitting at home and watching the game, it feels nothing like this. It appears far less advanced and a lot slower. I feel like what is going on in financial markets right now is like this. Interest rates are on the rise.

Everyone has been predicting this for some time now, we all just got the timing wrong. With this comes the doom and gloom predictions for the world economy, especially as it relates to house prices. Let's take a look at how households are really placed for interest rate rises.

The first chart looks at mortgage rates rising by around 300 basis points, which is broadly expected by the market mid-2023. The data suggest that over one-third of variable-rate borrowers have already been making average monthly loan payments (including irregular payments to redraw and offset accounts) sufficient to meet the resulting rise in required repayments. In other words, there is limited impact on these borrowers. On the other hand, just under 30% of borrowers would face relatively large repayment increases of more than 40% of their current payments.

Another important factor to consider is how many borrowers took advantage of historically low fixed rate loans through 2020 and 2021. The data tell us that the share of fixed rate loans went from 20% at the start of 2020 to a peak of nearly 40% in early 2022. The majority of currently outstanding fixed-rate loans are due to roll off within the next two years, with the greatest concentration of loans due to expire in the second half of 2023 as you can see in the chart below.

The risk is that these fixed rate loans mature and borrowers are faced with renewing their loans on much higher rates. Estimates suggest that around half of fixed-rate loans (by number) would face an increase in repayments of at least 40% as can be seen in the below chart. Borrowers with fixed-rate loans that are due to expire by the end of 2023 would experience a median increase of around $650 (or 45%) in their monthly repayments.

The silver lining is that at the same time that these borrowers' loans mature, the market is expecting the RBA to start cutting interest rates. At least for now, these borrowers are shielded for the time being from interest rate rises.

A couple of other factors that are worth noting. Household savings are at decade highs - around $260 billion since the onset of the pandemic.

And very low interest rates also helped many households add to their savings through reduced interest payments. Since the start of the pandemic, payments into offset and redraw accounts have been substantial, as you can see in the below chart.

Finally, when we look at household liabilities, we really should also look to the other side of the balance sheet - assets. Here is what Australia's household balance sheet looks like. I think it's worth putting things into perspective.

I am not saying for one moment that what the economy is undergoing is immaterial. I am not saying households will not be impacted. I am not saying financial markets will not become distorted as the market figures this out. I am not saying any of these things. All I am saying is, before we get so immersed in the headlines and fear mongering, let's look at the bigger picture. Let's take a step back and watch the game through a wider lens.

My colleague Matt Rigby and I talk more about this in last week's The Wide Lens podcast.

You can also listen to the podcast on Spotify or wherever else you listen to your podcasts.