The four major banks have revealed alarming predictions for interest rate rises, with expectations borrowers are in for multiple hits this year.
The major banks have confirmed homeowners’ worst fears – changing their forecasts to flag higher interest rates hitting much sooner, after the shocking increase in the cost of living was unveiled earlier this week.
While the Reserve Bank of Australia’s (RBA) previous stance had been to hold interest rates until 2023, data showed that the cost of living had hit a 22-year high, rising to 5.1 per cent from the year to March.
This has left the RBA with little choice but to hike up rates multiple times this year, according to experts, with the first rise expected for homeowners in 11 years.
Three major banks are predicting an interest rate rise will hit as early as next Tuesday.
ANZ, NAB and Westpac have both predicted a 0.15 per cent rise at the start of May.
The Commonwealth Bank has also forecast an 0.15 per cent rise but for June, although there have been chilling warnings that interest rates could hit 2.5 per cent in total by the end of the year.
The reasons for May
ANZ’s prediction would see the current record low interest rate rise from 0.1 per cent to 0.25 per cent.
There would also be a further 0.25 per cent hike to hit in June and this would quickly take the interest rate up to 0.5 per cent, according to the bank.
“Inflation pressures have momentum and have broadened. A cash rate target of 0.1 per cent is inappropriate against this backdrop,” ANZ’s economics team said.
“We don’t think the RBA needs to wait for more data on wages, given that its own liaison program indicates that wages growth had continued to pick up in the March quarter.”
ANZ head of economics David Plank added the case for the first hike in June is “weak” and he expects the RBA will be forced to make its first rate rise in over a decade next month.
NAB is predicting a string of rate rises, with the first sitting at 0.15 per cent in May and a further 0.25 per cent increase in June, July, August and November.
This would see interest rates hit a whopping 1.25 per cent by the end of the year.
The big bank said the cost of living data “exceeded” its expectations as well as the RBA’s most recent February forecast.
“Temporary factors continue to play a role in stronger inflation outcomes, but underlying inflation is likely to remain elevated into quarter two alongside further falls in the unemployment rate and strengthening wages growth,” NAB’s analysts said.
Westpac chief economist Bill Evans originally believed that the RBA will hold off on an interest rate rise in May as the RBA had already flagged it wanted to see additional data before making a call, but on Friday he said they would need to move next month.
It has estimated a 0.15 per cent rise in May, followed by 0.25 per cent increases for the rest of the year.
He believes that interest rates will hit 1.5 per cent by the end of 2022 and the RBA will only hold off on being more aggressive with its hikes due to a large amount of household debt.
The calls for a June hike
CBA has taken a more conservative approach with the prediction of a 0.15 per cent hike in June, despite the bank’s head of Australian economics Gareth Aird believing the RBA should raise rates next week.
“If the RBA lifts the cash rate at the May board meeting next week they will have reneged on what they said just last week – namely that the board agreed that it would take into account evidence on both inflation and the evolution of wages costs as it sets policy,” Mr Aird said.
The major bank has also predicted a 0.25 per cent rise in June and July.
Yet, some economists have gone even harder than the big banks with predictions that the interest rate could soar to 2.5 per cent by the end of the year.
At this rate, the average homeowner could be up for an extra $1000 a month to pay on their mortgage if the 2.5 per cent rate rise predictions are true.
For borrowers with an $800,000 mortgage, this would add an extra $1100 a month in repayments and $1298 a month for a $1 million mortgage.
On the smaller end, it would mean an additional $779 to monthly repayments for a $600,000 loan.
For 2023, forecasts have been made for interest rates to skyrocket to 3.4 per cent by mid-year.
Serious financial stress
It comes as almost two-thirds of Aussie borrowers think they will be under “serious financial stress” if their home loan interest rate goes up to 5 per cent, comparison website Mozo’s latest research found, which could happen with variable rates.
Looking at the current average variable rate of 3.03 per cent and the increases predicted by some of the major banks, it would send the interest rates soaring to almost 5 per cent, according to Mozo.
Its research also showed that more than half of borrowers have not stress-tested their ability to pay monthly mortgages at a higher interest rate, while 8 per cent believe any rate increase would put them under serious financial stress.
“With the last increase in the cash rate over 11 years ago, many borrowers will have never experienced a home loan interest rate hike so it’s little wonder many people are worried about the impact it could have on their finances,” Mozo spokesman Tom Godfrey said .
“It’s never too late to stress-test your ability to make repayments at higher interest rates. Something as simple as putting your home loan amount into a mortgage calculator to check what your repayments might look like as rates rise, can help you to budget and reduce your stress.”
Mozo also found that 59 per cent of homeowners fear losing equity in their home due to falling property prices.
“Losing equity in your home could become a problem if you’re forced to sell or refinance but if you’re able to hold on, continuing to pay down your principal is one of the best safeguards you can put in place,” Mr Godfrey said.
The RBA has predicted that a 2 per cent rise in rates would cut an estimated 15 per cent off housing prices.
Currently the best variable home loan rates in Mozo’s database are through online lenders, with the leading rate from Reduce Home Loans at 1.79 per cent.
However, the big four banks are still offering variable rate loans averaging 2.14 per cent compared with three-year fixed loans of more than 4 per cent, RateCity found.
Its database also showed 32 lenders that had at least one variable rate for owner-occupiers under 2 per cent.
Once in a lifetime increases to the value of homes
But principal mortgage broker Louisa Sanghera, founder of Zippy Financial, said many mortgage holders would be insulated from rate rises due to the huge increase in property prices.
“For some borrowers, this may well be their first-ever rate rise – but many of those same property owners have also experienced once-in-a-lifetime increases to the values of their homes or investment properties over the past year,” she said.
“This means that their overall net worth has put them in a far better position that if they had never purchased because of an unrealistic fear of interest rate rises, which are a normal part of monetary policy, let’s not forget.”
She predicted a 0.25 per cent rise to interest rates over many months.