Why are Australian mortgage rates going through the roof?

Highlights

• Property prices have risen steadily since the onset of the pandemic amidst record-low interest rates.
• The latest data from the RBA reveals that variable and fixed rates have increased over the past one month.
• Unlike fixed-rate mortgages, variable-rate mortgages offer rates that move in tandem with fluctuations in the benchmark interest rate.

Owning a property has become increasingly difficult across major economies in the world amidst a surge in housing prices. Property prices have risen steadily since the onset of the pandemic. With central banks reducing interest rates to near-zero levels, first-time homebuyers have resorted to mortgage lending to fulfill their wish of owning a roof over their head.

However, as soon as the pandemic-related uncertainty subsided and an economic rebound took place, central banks started raising interest rates in most countries. Defying the trend, the Reserve Bank of Australia (RBA) has not yet announced a rate hike, even as the US Fed revealed its first interest rate surge after months of speculation.

The financial market is anticipating Australia’s interest rate hike as soon as June 2022 and bracing for higher mortgage rates ahead. In the US, the pandemic-induced buying frenzy has now led to a rise in mortgage rates. There has been a drastic decline in the demand for second homes in the US amidst a steep rise in mortgage rates.

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A similar situation is brewing in Australia even as the first cash rate hike is awaited. Currently, the cash rate stands at 10 basis points and has induced a stream of heavy borrowing in the country.

What’s happening with mortgage rates?

Mortgage rates have been rising in Australia for owner-occupier home loans. The latest data from the RBA reveals that variable rates have increased over the past one month, potentially due to the possibility of rising interest rates in the near term.

As per the RBA statistics, the variable discounted housing loan rate for owner occupiers has increased from 3.45% in February 2022 to 3.6% in March 2022. The variable mortgage rate remained at 3.45% for a period of 7 months, from August 2021 to February 2022.

Interestingly, fixed-rate loans have shown an even sharper monthly uptick in March 2022. The RBA data included the rate for a 3-year fixed housing loans obtained by owner-occupiers, which was reported to be 3.77% in March 2022. This was higher by 29 basis points than February’s rate of 3.48% for 3-year fixed loans.

The higher increase in fixed mortgage rates is in tandem with the big four banks’ latest hike in fixed rates. Recently, Westpac Banking Corporation (ASX:WBC) hiked fixed rates for owner-occupiers by up to 0.3 percentage points, which represents the ninth hike in the last six months. The measure has been taken by Westpac to meet the rise in funding costs.

Meanwhile, Commonwealth Bank of Australia (ASX:CBA), National Australia Bank Limited (ASX:NAB) and Australia and New Zealand Banking Group Ltd (ASX:ANZ) are still offering one-year fixed rates under 3%.

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What can Aussie mortgage holders expect?

The sad news is not yet over for Aussie mortgage holders, as rates could rise even further in the coming months. The predicted June rate hike could bring with it a series of hikes across the mortgage rates offered by all commercial banks.

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To understand the situation, it seems important to know the difference between fixed-rate and variable-rate mortgages. Unlike fixed-rate mortgages, variable-rate mortgages offer rates that move in tandem with fluctuations in the benchmark interest rate. However, they also have a fixed component, which lasts for the first few months of the loan being taken out.

Depending on the loan agreement, this fixed-rate period can be as long as 6 months or even 10 years. But once the fixed-rate period ends, market fluctuations can make loan repayments excruciatingly hurtful.

Since most Australians have a variable rate mortgage, the end of their fixed-rate period would mean that market rates would apply to their existing loans. As a huge number of Australians have obtained a home loan in the last one year, it is highly likely that their fixed period matures sometime this year or in the coming few years.

Any cash rate rise in the coming months could significantly increase interest payments for households, which were comfortably sitting at a bare minimum level until now. In fact, expectations of a sooner surge in cash rate have already ignited mortgage rates across Australia, fuelling concerns for mortgage holders.

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