Markets bet on a hefty rise in interest rates

At one end of the debate, Commonwealth Bank economists think the cash rate will only need to go to 1.25 per cent by next year to achieve the RBA’s objective because this would take mortgage repayments to their long-term average of about 15.5 per cent of household disposable income.

ANZ Bank economists are taking a different view, predicting the cash rate will eventually go above 3 per cent, though not until about 2025.

These forecasts might turn out to be wrong, just like those dire predictions many economists made of a COVID-19-driven property market meltdown in 2020.

But whoever is right, the hefty size of the average mortgage these days means that rates do not have to move by all that much to have a sizeable impact on monthly repayments.

For example, RateCity calculates that a 1.75 per cent peak in the cash rate by 2024, as forecast by Westpac, would add $ 431 onto the monthly repayments for a $ 500,000 loan. If ANZ’s call is correct and the cash rate goes to 3 per cent by 2025, repayments on a $ 500,000 mortgage would rise by a whopping $ 771 a month.

Would not these sorts of increases force households to rein in their budgets, threatening to slow the economy?

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Yes, but that is the whole point of raising interest rates: it dampens activity, and inflation.

At the same time, however, banks are confident the vast majority of their customers will cope with higher rates.

For one, they point out households are sitting on a massive savings pile of about $ 250 billion, much of which is in mortgage offset accounts, allowing people to pay down debt faster. When rates rise, borrowers will probably find it tougher to pay back debt quite so quickly.

Banks – which stand to benefit from higher rates – also say borrowers have been “stress tested” against higher rates as part of being approved for loans.

Finally, it’s worth remembering that if inflation is rising, wages should also be increasing, making it easier to repay debt. At least that’s the theory.

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