NAB is now expecting the Reserve Bank to raise interest rates three more times to a new 11-year high of 4.1 per cent by May – admitting it could cause a recession.
Should that prediction come true, a borrower with an average $600,000 mortgage would see their monthly repayments surge by another $283 a month on top of the $997 increase endured since May last year.
That $1,280 jump in monthly repayments would add up to $15,360 over a year.
National Australia Bank on Tuesday updated its forecasts to have the RBA raising interest rates by a quarter of a percentage point in March, April and May.
This would take the cash rate to 4.1 per cent, the highest since May 2012, up from an existing 10-year high of 3.35 per cent, after previously forecasting a 3.6 per cent peak.
NAB chief economist Alan Oster said the RBA risked causing a recession – something rising interest rate haven’t done since 1991.
‘We still don’t expect a technical recession in Australia – but with rates rising above 4 per cent, it is becoming more of a possibility,’ he said.
NAB is now expecting the Reserve Bank to raise interest rates three more times to a new 11-year high of 4.1 per cent by May – admitting it could cause a recession (pictured is a Melbourne branch)
‘Ultimately, a more significant downturn would see rates cut more quickly in early 2024.
‘Rates rising into more restrictive territory will have growth implications.’
Average borrowers on a 30-year loan term are now paying $3,303 a month, a 43 per cent jump from $2,306 a month in early May 2022 when the RBA cash rate was still at a record-low of 0.1 per cent.
Another three rate rises would see repayments jump $283 to $3,586, which would mark a 55.5 per cent, or $15,360, increase in just a year as variable mortgage rates at the Commonwealth Bank soared from 2.29 per cent to 5.97 per cent. They will rise to 5.22 per cent on February 17 to reflect the latest RBA rate hike.
AMP Capital chief economist Shane Oliver said a 4.1 per cent RBA cash rate would cause a recession because 6 per cent variable rates in 2023 would have the same effect as a 17.5 per cent Reserve Bank cash rate in 1990.
‘You don’t need to raise interest rates as much as they were back then because the debt-to-income ratio is three times what it was back then,’ he told Daily Mail Australia.
Should that prediction come true, a borrower with an average $600,000 mortgage would see their monthly repayments surge by another $283 a month on top of the $997 increase endured since May last year. That $1,280 jump in monthly repayments would add up to $15,360 over a year (pictured is a Sydney auctioneer Karen Harvey in May 2021)
Borrowers with an average $600,000 mortgage who fixed a 25-year loan at 1.92 per cent in May 2021 would be particularly vulnerable.
They would be going from paying $2,520 a month to $4,580 – an 81.7 per cent increase – as they moved straight on to a ‘revert’ variable rate of 7.43 per cent.
The fine print in fixed loan contracts two years ago stipulated borrowers would be moved on to a variable rate of 3.43 per cent but that was based on a 0.1 per cent RBA cash rate, a RateCity analysis of the Big Four banks showed.
Sydney’s median house price of $1.2million is now so dear an average, full-time worker on $92,000 would have a debt-to-income ratio of 10.5 after a 20 per cent deposit.
That is well beyond the Australian Prudential Regulation Authority’s ‘six’ threshold for mortgage stress.
In 1990, Sydney’s median house price of $194,000 was 5.3 times an average, full-time salary of $29,344 after a 20 per cent deposit.
A 4.1 per cent RBA cash rate means borrowers with a $1milllion mortgage, on a 30-year term, be paying another $473 a month as their repayments rose to $5,977, up from $5,504.
In a year, they would have seen their repayments soar by $25,608.
Inflation last year surged by 7.8 per cent, the steepest annual increase in 32 years and a level well above the RBA’s 2 to 3 per cent target.
The Commonwealth Bank is expecting a 3.85 per cent RBA cash rate by April while Westpac and ANZ are expecting it by May.