Fixed-rate mortgages will tip over a $16,500 cliff

Key points

• Hundreds of thousands of homeowners with fixed-rate mortgages face a $16,500 repayment cliff this year.
• Economists fear repayments could punch a $20 billion hole in the economy.
• The Reserve Bank of Australia has increased official interest rates at its past nine meetings, taking the cash rate to a 10-year high of 3.35 per cent.
• Experts are concerned the RBA has lifted interest rates too far and not paid enough attention to the way they affect the economy.
• RBA governor Philip Lowe will face two parliamentary committees this week, starting with the Senate on Wednesday, where the bank’s actions will come under scrutiny.

Hundreds of thousands of homeowners with fixed-rate mortgages face a $16,500 repayment cliff this year that, along with further interest rate rises from the Reserve Bank, could punch a $20 billion hole in the economy.

Analysis by KPMG suggests those people who took advantage of record-low fixed interest rates in 2020 and 2021 will this year confront a financial hit so large it will slow the economy more than expected by the RBA.

Home buyers on fixed-rate mortgages face a $16,500 jump in their repayments over 12 months, an analysis has found.Credit:Peter Rae

Politicians and some economists fear the economy could be plunged into recession over the next two years as the central bank unleashes its most aggressive tightening of monetary policy in more than three decades.

The Reserve has increased official interest rates at its past nine meetings, taking the cash rate to a 10-year high of 3.35 per cent. Financial markets expect the cash rate to peak at 4.1 per cent in August, suggesting another three rises of a quarter of a percentage point in coming months.

Variable mortgage rates have moved largely in line with the RBA’s increases, but many Australians took advantage of record-low fixed-rate loans during the depths of the COVID pandemic. More than 800,000 of those fixed mortgages are due to reset this year.

KPMG Australia chief economist Brendan Rynne said with the average mortgage now $600,000, a person with a fixed-rate loan faced a $16,500 after-tax increase in interest payments over 12 months, once their mortgage rate was reset.

Rynne said the Reserve’s tightening of monetary policy was now working on a “two-stage” basis, as variable-rate mortgage holders were about to be joined by those with fixed-rate loans.

“The first stage gradually hitting variable mortgage holders, as the cash rate increases are passed on (relatively quickly) by their banks, and the second stage hitting fixed-rate mortgage holders in a shock-fashion as they move from their very low fixed rate to the current market variable rate,” he said.

Last week, the Reserve Bank released its updated forecasts for the economy. It expects economic growth to slow from 2.7 per cent through 2022 to 1.6 per cent in 2023 and 2024.

Rynne said if the RBA pushed ahead with three more interest rate rises over the next six months, households – which account for about 60 per cent of all economic activity – would spend $20 billion less this year. That would wipe a full percentage point from economic growth.

KPMG Australia chief economist Brendan Rynne says the RBA’s aggressive interest rate hikes will slow the economy more than expected.

“It would not be unreasonable to expect household consumption expenditure to be around $20 billion lower over this year as a direct consequence of the monetary policy tightening, with 1 per cent being shaved off GDP,” he said.

“It would seem the RBA’s forecasts are optimistic and once the effects of higher interest rates flowing through to higher rents and the full impacts of real wage losses are factored in, then the slowdown in economic activity over the coming year is likely to be even more acute than even these updated forecasts by the RBA suggest.”

AMP Capital chief economist Shane Oliver said he was increasingly concerned the RBA was lifting interest rates too far and not paying enough attention to the lagged way in which higher rates were affecting the economy.

“This is increasing the risk of a recession that we don’t have to have and with that, a bigger rise in unemployment and a bigger fall in home prices,” Oliver said.

RBA governor Philip Lowe will face two parliamentary committees this week, starting with the Senate on Wednesday, where the bank’s actions will come under scrutiny.

The Reserve is driving up interest rates to deal with inflation, which reached a 30-year high of 7.8 per cent in the 12 months to the end of December.

In parliament, the Coalition used a string of questions to Prime Minister Anthony Albanese to argue government policy was driving up inflation. But Albanese said global factors were to blame.

“It is a reality of a world where there is inflation. I think Australians understand that. There is a lot of pressure, upward pressure, on interest rates at the moment,” he said.

Both the RBA and the federal Treasury believe inflation has peaked and expect it to moderate through the next two years. The Reserve expects it to be at 4.8 per cent by the end of 2023.

But Westpac economist Justin Smirk said on Monday inflation could fall faster than expected as price pressures in areas from petrol to furniture to the cost of holiday travel began easing rather than picking up.

“Our end of 2023 forecast for CPI is 3.9 per cent – well above the top of the RBA’s inflation target band, but still representing a meaningful moderation from the current pace,” Smirk said.

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