Reserve Bank: Mortgage holders paying 22% of income in interest by year's end

Tuesday, 2 May 2023

Reserve Bank governor Adrian Orr began the tightening cycle in 2021 and most economists expect he is not quite done.

Homeowners with a mortgage can expect to be paying 22% of their disposable income in interest payments on their home loan on average by the end of the year, the Reserve Bank says.

That would be up from a low of 9% in 2021, and the increase will be much higher for many recent home-buyers with hefty mortgages.

The increased debt-servicing burden would be distributed highly unevenly, with borrowers who had fixed at the low of mortgage rates in mid-2021 seeing far greater rises in their debt-servicing costs than others, the bank said.

The average effective interest rate paid on mortgages and business lending had risen by 185 basis points and 400 basis points respectively since the Reserve Bank began tightening monetary policy and hiking interest rates in 2021, it said.

Reserve Bank deputy governor Christian Hawkesby discusses inflation in February.

* Some household budgets will be crushed by rising interest rates this year, Westpac says

* 'A larger correction remains a possibility,' Reserve Bank says of falling house prices

It forecast that, based on current mortgage and swap rates, the average effective interest rate on mortgages would reach 6.1% by the end of the year.

“More borrowers may fall behind on their payments this year, given the ongoing repricing of mortgages and expected weakening in the labour market,” deputy governor Christian Hawkesby said.

But he said the Reserve Bank was not currently seeing widespread financial distress among households or businesses, which he attributed to the strength of the economy and labour market to date.

Banks’ high levels of profitability and their strong capital positions would put them in a good position to “take a long-term view and support their customers”, he said.

The bank calculated that about 60% of mortgage debt was either on a floating interest rate or on a fixed rate that would need to be reset within 12 months, while for businesses about 80% of bank lending was either floating or due to be repriced within three months.

As businesses tended to be on shorter-term loans, they would already have swallowed much of the predicted increase in debt-servicing costs, it said.

The Reserve Bank said that despite the significant rise in the average debt-servicing costs for mortgage holders, the average share of their disposable income that would be consumed by interest payments should still be lower at the end of year than it was during a peak in mid-2008.

Hawkesby encouraged borrowers who were experiencing financial stress to talk to their banks, saying hardship programmes might be available and some customers might be able to temporarily switch to interest-only payments or increase the term of their loan.

The Reserve Bank will comment further on the resilience of the banks when it releases a financial stability report on Wednesday, but said it had decided to “pre-release” the information in its statement on Tuesday.