Young borrowers at risk in the face of rate rises or economic shocks

Construction

The Reserve Bank is cooling down calls for interest rate hikes, singling out young home loan borrowers as being a risk to the economy.

The RBA says young households with lower incomes, uncertain employment and less savings are a risk to the economy if there are any shocks.

In their July minutes, the central bank said they have discussed in detail Australia’s high household debt which they conclude needs to be closely and carefully monitored.

While the official cash rate remains at 1.5 per cent, some borrowers are starting to be hit by a round of out-of-cycle interest rate hikes on variable mortgages by regional lenders and credit unions.

For borrowers of a $1 million dollar home, those hit by rate hikes are paying around $60 a month extra.

The big four banks have not passed on higher funding costs yet, no doubt due to the heat they are feeling from the banking royal commission, but interest rate comparison website RateCity’s Sally Tindall said it’s coming.

“It’s only a mater of time before one of the big four banks hike,” she told The Australian.

“While the threat of negative publicity has kept them at bay, eventually the pressure on their profit margins will be too great.”

The ratio of household debt to income hit a new record in the March quarter, rising to 190.1 per cent and the RBA minutes said higher levels of household debt could affect economic outcomes.

“For example, households with high debt levels are more vulnerable to economic shocks and therefore more likely to reduce consumption in the face of uncertainty about their future income,” the RBA minutes state.

The RBA deputy governor said back in May that Australia’s high household debt and the likelihood of higher interest rates down the track posed a key risk to Australia’s economic outlook.

The RBA says forcing borrowers back onto interest-and-principal loans could force many to refinance or sell up.

Interest-only borrowers are staring down the barrel of a rise in repayments between 30-40 per cent, or around $7000 a year for a $400,000 mortgage over a typical 30-year life span and five-year interest free period.

As a result, the RBA say that right now there’s no strong case for a near-term adjustment in monetary policy.

“Rather, the Board assessed that it would be appropriate to hold the cash rate steady and for the Bank to be a source of stability and confidence while this progress unfolds.

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