[#13]
Higher interest rates will have a larger impact on household cash flows than historically due to the low base of interest charges recently available. In other words, there could be a higher sensitivity to changes in interest rates from a nominal repayment perspective.
If a home loan at 2.0% was to be repaired over a 30-year period, then a $500,000 loan would have required $1,848 per month (of which 45% would be interest costs). If the home loan rate rose to 4.0%, then would require $2,387 per month (of which 70% would be interest costs). The extra $539 per month would represent an additional 29% in monthly payments. In contrast, a rise from 5% to 7% (also +200 bps) would have represented a smaller 12% increase in monthly payments. That said, lenders asses serviceability at levels higher than product rates at the time of application, so a 200 to 300 basis point rise in mortgage costs should not (at least in theory) lead to significant foreclosures as those higher repayments would still fall within serviceability buffers. However, higher mortgage costs will still probably have indirect consequences for the broader economy as households possibly choose to consumer less discretionary items as housing expenses rise (they may eat out at restaurants less often to cover higher mortgage costs). This is after all the objective of the RBA (there is too much demand for goods and services and not enough supply, which is creating inflationary pressures, so raising interest rates should help reduce demand and as that normalises closer to supply, then inflationary pressures should ease.).
Below table illustrates estimated monthly repayments by loan amount and interest rate:
Loan amount
Gross income (4-times debt)
Gross income (6-times debt)
2.0% interest monthly repayment
3.0% interest monthly repayment
4.0% interest monthly repayment
5.0% interest monthly repayment
6.0% interest monthly repayment
1 $100,000
$25,000
$16,667
$370
$422
$477
$537
$600
2 $200,000
$50,000
$33,333
$739
$843
$955
$1,074
$1,199
3 $300,000
$75,000
$50,000
$1,109
$1,265
$1,432
$1,610
$1,799
4 $400,000
$100,000
$66,667
$1,478
$1,686
$1,910
$2,147
$2,398
5 $500,000
$125,000
$83,333
$1,848
$2,108
$2,387
$2,684
$2,998
6 $600,000
$150,000
$100,000
$2,218
$2,530
$2,864
$3,221
$3,597
7 $700,000
$175,000
$116,667
$2,587
$2,951
$3,342
$3,758
$4,197
8 $800,000
$200,000
$133,333
$2,957
$3,373
$3,819
$4,295
$4,796
9 $900,000
$225,000
$150,000
$3,327
$3,794
$4,297
$4,831
$5,396
10 $1,000,000
$250,000
$166,667
$3,696
$4,216
$4,774
$5,368
$5,996
11 $1,100,000
$275,000
$183,333
$4,066
$4,638
$5,252
$5,905
$6,595
12 $1,200,000
$300,000
$200,000
$4,435
$5,059
$5,729
$6,442
$7,195
13 $1,300,000
$325,000
$216,667
$4,805
$5,481
$6,206
$6,979
$7,794
14 $1,400,000
$350,000
$233,333
$5,175
$5,902
$6,684
$7,516
$8,394
15 $1,500,000
$375,000
$250,000
$5,544
$6,324
$7,161
$8,052
$8,993
16 $2,000,000
$500,000
$333,333
$7,392
$8,432
$9,548
$10,736
$11,991
17 $2,500,000
$625,000
$416,667
$9,240
$10,540
$11,935
$13,421
$14,989
18 $3,000,000
$750,000
$500,000
$11,089
$12,648
$14,322
$16,105
$17,987
19 $3,500,000
$875,000
$583,333
$12,937
$14,756
$16,710
$18,789
$20,984
20 $4,000,000
$1,000,000
$666,667
$14,785
$16,864
$19,097
$21,473
$23,982
21 $5,000,000
$1,250,000
$833,333
$18,481
$21,080
$23,871
$26,841
$29,978
22
If interest rates are 2.0%, then debt at x4 income would require 18% of income to service.
If interest rates are 3.0%, then debt at x4 income would require 20% of income to service.
If interest rates are 4.0%, then debt at x4 income would require 23% of income to service.
If interest rates are 5.0%, then debt at x4 income would require 26% of income to service.
If interest rates are 6.0%, then debt at x4 income would require 29% of income to service.
23
If interest rates are 2.0%, then debt at x6 income would require 27% of income to service.
If interest rates are 3.0%, then debt at x6 income would require 30% of income to service.
If interest rates are 4.0%, then debt at x6 income would require 34% of income to service.
If interest rates are 5.0%, then debt at x6 income would require 39% of income to service.
If interest rates are 6.0%, then debt at x6 income would require 43% of income to service.
24
If interest rates rise from 2.0% to 3.0%, then loan repayments will rise by 14%.
If interest rates rise from 2.0% to 4.0%, then loan repayments will rise by 29%.
If interest rates rise from 2.0% to 5.0%, then loan repayments will rise by 45%.
If interest rates rise from 2.0% to 6.0%, then loan repayments will rise by 62%.
