Australian mortgage rates increase faster than international peers

Australia’s outstanding mortgage rates have increased at a faster pace than in many other developed countries, new analysis by AMP Bank’s deputy chief economist Diana Mousina has said.

Speaking on the AMP Bank Market Insights Webinar on Tuesday (19 March), Mousina outlined that while mortgage rates in Australia are generally lower than in other (similar) economies, the outstanding mortgage rate is among the highest than in many other jurisdictions.

For example, while the official cash rate in Australia has risen by 425 bps since the beginning of the rate-hiking cycle (which Mousina said was “pretty much around the middle compared to some of our global peers and probably towards the lower end of that compared to major countries”), she added that the change in outstanding mortgage rates – the rates paid by borrowers – was one of the highest.

She explained: “The dynamics in the housing market here are that most people borrow in short-term, fixed mortgages or they’re on variable rates. So what that means is that the pass-through from interest rate changes to the outstanding mortgage is very high. However, in countries like the US where you can fix your loan for 30 years, there’s been less than a 0.5 per cent change to outstanding mortgage rates, even though they’ve had 525 bps of rate hikes.

“So this just shows you that the sensitivity of households here to mortgages is much higher. This is why we’re seeing mortgage interest payments in Australia rise to around a record high.”

Mousina said that the percentage of household income going towards interest repayments on home loans was 9 per cent in Australia, however, this is when based across all households (including renters).

She added that she expects the percentage of income for those who have a mortgage to be “a lot higher”.

Mousina continued: “Some estimates suggest that people are paying 50 per cent of their income on principal and interest for their mortgage, especially in capital cities like Sydney and Melbourne where the prices of dwellings have continued to rise to a record high.

“Those that have a mortgage are under quite significant stress from rising interest rates. So this tightening that we’ve had in monetary policy in Australia has meant that global growth in Australia has weakened quite a lot.”

The webinar came as the Reserve Bank of Australia’s monetary policy board met to make its March rate decision, where it decided to hold the cash rate at 4.35 per cent.

During the webinar, Mousina said that AMP Bank believes the cash rate will start falling in August.

“We had been saying that the RBA will start cutting interest rates in June, but it probably is looking like it’s a little bit too soon,” she told brokers.

“We think that we’ll probably start to see some rate cuts probably about August.

“Now if we’re correct in our forecasts on inflation, we’ll see a faster drop in inflation than the RBA is expecting.

“We think that we’ll see probably about two or three interest rate cuts this year.

"That’s a bit more than where financial markets are pricing at the moment but we are quite concerned about the consumer.”

Speaking to Mortgage Business earlier in the day, Mousina said that AMP expects the RBA to cut rates by August, if not earlier. She continued that AMP’s original prediction of rate cuts would be pushed back.

[Related: Timeline for inflation target ‘remains uncertain’ as RBA holds]