The Fixed Rate Cliff Was A Myth

October 10, 2023

Most low-rate era fixed-rate mortgages have now rolled over to higher variable rates. Based on previous media headlines, one would expect to see a Mad Max style Dystopia by now. Yet here we are, and all looks quite Rosy. On balance, the Australian economy is doing well. Despite the rate rises, business confidence and sentiments are improving. Businesses continue to borrow and expand their operations - driving wages, the economy and property markets.

Homeowners have been more resilient than expected in their ability to service their debt, given the sharp rise in interest rates. However, unlike the business community, consumer sentiment is undeniably very low. However, that was the goal in the first place. To reduce consumer discretionary spending and curb inflation.

The key takeaways are below.

  • Most Australian borrowers have continued to service their debts despite higher inflation and interest rates.
  • However, the share of variable rate borrowers whose repayments exceed their incomes is up to 5%, from just 1% in May 2022. However, this does not necessarily indicate mortgage stress, as most borrowers coming off fixed rates have enough savings to cover 12 months of mortgage repayments.
  • Base rate incomes have risen slightly; however, incomes have increased by up to 15% in some tiers as people take on extra work such as overtime, expanded hours, etc.
  • The business sector remains resilient overall, as strong demand and high cash buffers have supported business profitability and balance sheets.
  • There are few signs of financial stress among owners of Australian commercial real estate (CRE)

Overall, the RBA’s ‘soft landing’ approach appears to be working. However, this may foreshadow further bad news for borrowers, as the RBA's report indicates that households and businesses can sustain further rate hikes if required.

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