Down Under Disaster: Aussies hit hardest by hikes, paying $60 billion more to cover their mortgage since hikes began

New analysis from leading financial comparison site Mozo.com.au reveals Aussies have collectively paid $60 billion more to cover their mortgage since the rate hiking cycle began in May 2022, due to the fact a large proportion of our mortgage market comprises variable-rate loans.

Aussie mortgage holders have been hit harder and faster by rate hikes than other advanced economies, despite the Reserve Bank of Australia (RBA) cash rate sitting almost 1% lower than US and UK central bank counterparts.

The analysis has led Mozo experts to reaffirm their prediction that the RBA has reached the peak of the hiking cycle and will not increase the cash rate this year, despite recent market predictions to the contrary. 

“In comparison to other economies, Aussies really feel the pinch of every cash rate hike, and this can be seen in the exorbitant amount of interest now being paid on mortgages down under,” says Peter Marshall, Mozo banking and rates expert.

“Aussies are paying $60 billion more a month in repayments than they were two years ago, so it’s highly unlikely the RBA will hike the cash rate for a 14th time, but they’ll certainly be indicating the risk of a hike in their statement next Tuesday.”

“Announcing the risk of another rate hike is part of the effort to produce the same consequences, without having to actually hike the cash rate again, as the RBA won’t want to increase the cash rate unless it's really necessary.”

Aussies are feeling more pain, despite a “lower” cash rate.

Following the release of the March Quarter CPI data, where the quarterly inflation rate (1%) outpaced economist forecasts (0.8%), the next rate move in Australia is under speculation. However, Marshall stresses this slight jump is inline with the RBA’s inflation forecasts.

“Before getting caught up in the hype of market and investor sentiment it's crucial to remember the disproportionate impact of tightening measures on the Australian mortgage market,” says Marshall. 

The current cash rates for the US and the UK stand at 5.25 - 5.50%, and 5.25% respectively, while Australia’s cash rate sits at just 4.35%.

However, the Australian mortgage market has a different make up to other advanced economies, due to a prevalence of variable-rate loans, so rate hikes have impacted Aussie mortgage holders more than their US and UK counterparts. 

In Australia, variable-rate mortgages account for roughly 70% of all loans, while in other advanced economies, fixed-rate loans dominate.

IMF data reveals this is especially true in the US and the UK, with mortgage markets comprising 95% fixed and over 80% fixed rate loans, respectively.

“The disproportionate burden of these rate hikes is because the Australian mortgage market is predominantly variable rate home loans, and cash rate hikes are passed on faster to those with variable rate mortgages,” explains Marshall.

“RBA cash rate hikes have hit our mortgage market harder than those countries with mostly fixed-rate mortgages, so the pain for Aussies has been more intense.”

“More than two thirds of Aussie mortgage holders have variable rate home loans, which is why in our view, there is still a rate cut on the table for 2024. It just may not be as soon as we had originally hoped.”

Aussies paying $3 billion more a month compared to 2022

Mozo analysis shows Australians are paying roughly $3 billion more every month just to cover their mortgage, based on the latest average loan size data and the average variable rate in the Mozo database. 

According to Mozo research, the 4.25% added to the cash rate since May 2022, has increased monthly mortgage payments on the average Australian home loan by $1,338 a month. 

Based on the average home loan size, the proportion of variable rate home loans and the 3.2 million mortgages in Australia, Aussies are paying a whopping $3 billion more every month to cover rising repayments.

In the US, the cash rate sits 1% higher than the RBA cash rate, but with 95% of the market on fixed rate loans, borrowers have a sense of security, and many have been shielded from the recent hiking cycle. 

In fact, some lucky borrowers in the US were able to secure ultra-low fixed rate loans starting with 2 for up to 30 years. Research from the Federal Housing Finance Agency (F.H.F.A) estimates that if US fixed-rate mortgage holders were not on long-term fixed rate mortgages, and instead were on variable rates (known as adjustable-rate mortgages in the US), they would have been coughing up $511 USD more a month, by the end of 2023.

Research notes:   The $60 billion increase in interest paid on variable rate mortgages is an estimate based on latest published statistics and the historical average advertised rates from the Mozo database. Starting from a baseline in April 2022, Mozo has used the average loan sizes for owner-occupier dwellings published in the ABS Lending Indicators until March 2024, extrapolating the same amount for the next two months of April and May 2024 (not yet published). The annual percentage rate used is the average advertised variable rate from the Mozo database for owner occupier borrowers paying principal & interest on the average loan amount with a 80% loan-to-value ratio (LVR), using the corresponding average rate applied to each month's average national loan amount. The interest calculated on the average loan is based on the midpoint of a fully amortised 25 year mortgage, taking the interest charged in the 150th month. The difference between the interest charged in each month's scenario and what the interest would be using the April 2022 base average interest rate (3.03% p.a.), was then derived with a maximum average variable rate of 6.85% p.a. in January and February 2024. The increase in interest payments was multiplied by the number of residential mortgages using the 2021 Census Housing Tenure statistics, and a reduced number to only include variable rate mortgages (70% of 3,258,961)as reported by the RBA Statement of Monetary Policy in February 2023. The cumulative total of additional interest is the total amount of $60,281,923,022. This estimate is a representative figure for the average scenario and demonstrates the impact of home loan rate hikes on mortgage repayments.