Borrowers who blocked super-cheap mortgages during the coronavirus pandemic are fast approaching a storm that is likely to lead to much more significant monthly payments.
Analysts and financial experts are raising the cost of home loans for those who have “fixed” their mortgages at historically low rates in the early stages of Covid-19 as their generous terms expire within the next year or so.
This is what many analysts call a “break”, with Canstar Finance expert Steve Meckenbecker warning that up to 500,000 borrowers could reach that point overnight.
“Only those who still have time for a fixed-rate loan will be deprived,” says Mr. Meckenbecker.
“The increase in payments may not seem very serious, but wage growth is lagging behind the cost of living, increasing financial pressure on many families will contribute.”
The number of people taking ultra-low-rate loans, of course, grew in 2020 when the RBA cut borrowing costs to help the economy continue to grow.
The RBA has also repeatedly predicted that there will be no need to raise rates until 2024.
But to the shock of Governor Philip Lowe and his council – if not economists who warned of such an outcome – a stronger-than-expected surge in inflation led to what the marching cycle brought forward.
The war in Ukraine and the constant disruptions in Covid-19 supply chains forced the RBA this month to press the hook of the first of what is likely to be a series of rate hikes next year.
The target cash rate on May 3 was lifted for the first time in a decade, increasing by 25 basis points more than expected, from 0.1% to 0.35%.
It is expected that in 2022 and 2023 there will be several more increases, with Westpac pushing the target cash rate to a peak of 2.25 percent in May next year.
In essence, this means that those who took out a three-year term loan in 2020 – typically the most common period of time – are now facing a sudden jump in costs when those conditions end in 2023.
Meckenbecker says the usual scenario could be when people move from a fixed rate of about 2 percent to a market where daily rates are 5 percent and above.
Large banks in recent months have repeatedly increased the cost of loans with fixed interest rates amid rising inflationary pressures and increasing the likelihood of action by the RBA.
RateCity.com research director Sally Tyndall said before the RBA boost in May that people who had fixed a loan of less than 2 percent for years would “laugh down to the bank” after the boost, knowing they were immune to any exchange rate changes for at least a couple more years.
However, she said that “anyone who receives a fixed rate will face an omnipotent shock when they see what the banks are offering.”