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Speaking at the Australian Banking Association (ABA) Conference yesterday (26 June), assistant governor (financial markets) of the Reserve Bank of Australia (RBA), Christopher Kent, highlighted the current effects of restrictive monetary policy on households.
Since the beginning of the RBA’s tightening cycle in May 2022, Kent said that the average rate on outstanding mortgages has risen by 335 bps over the phase to “a little over 6 per cent”.
“While higher interest rates affect the decisions of all households, the effects of tighter monetary policy are felt most directly by the roughly 40 per cent of Australian households with a mortgage,” Kent said.
“Pass-through has been a bit less than in the past because of the high share of mortgages fixed at low rates during the pandemic. Increased discounting on mortgages by lenders competing for borrowers has also played a role.
“Nevertheless, the increase in mortgage rates has been large and rapid. Also, most of the remaining low fixed-rate loans from the pandemic era will expire this year, which will add around 20 basis points to the average outstanding mortgage rate.”
Kent highlighted that loan or mortgage discharges from property sales have increased and “by more than the rise in new lending”.
“These trends are likely to reflect incentives to reduce or limit indebtedness in response to higher interest rates,” he said.
He said that the average loan-to-value ratios for new loans have declined over this phase of the tightening cycle as an example of a decline in household indebtedness.
Indeed, the RBA revealed the housing loan discharges (quarterly, seasonally adjusted) were running at a record quarterly high value of around $40 billion, while new loan commitments were valued at approximately $80 billion, well below the peak in 2022.
Kent said that higher rates were providing an incentive for “all households to save more and borrow less”.
“For households with a mortgage, despite higher debt-servicing costs and other pressures on disposable incomes, payments into offset and redraw accounts have increased as a share of income over recent quarter,” Kent said.
“Flows of these extra payments are now a bit above their pre-pandemic average. By contrast, the gross savings rate across all households has declined and is now below pre-pandemic levels.”
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