‘We’re heading into uncharted territory’: Expected rate rise will test borrowers’ limits

He warned that due to the typical three-month lag on mortgage rates increasing, the effects will not be felt until February next year.

“We are heading into unchartered territory. The simplest way to think about it, there’s going to be more and more households who will find themselves in mortgage stress.”

He said mortgage stress from rising rates will be compounded by high inflation on essential goods and services as well as the negative wealth effective felt from falling property prices.

Senior economist Matthew Hassan at Westpac, who also forecasts a 50 basis point increase and a rate peak of 3.85 per cent, said those who were stressed tested by an extra 3 percentage points from November 2021 will be better placed than those tested by an extra 2.5 per centage points but not for long.

“We’re definitely in uncharted territory in terms of the speed. It’s a record pace of tightening, we’re now passing some of these stress test thresholds. So, we’ll be testing their actual ability and actual comfort zone,” Hassan said.

He said while households were already cutting down on spending, there would more distressed property sales if there were additional shocks such as job losses.

Hassan said home owners would struggle to refinance if the property had lost value since purchase or if their income had been impacted.

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ANZ senior economist Felicity Emmett, who is expecting a 25 basis point increase, said most home buyers should be safe even after tomorrow’s announcement because of the savings war chest built up in offset accounts during the first two years of the pandemic.

“But it is likely that first home buyers that have gone in in the last couple of years, and that we know that they tend to have higher loan-to-value ratios and lower buffers, that they might be the ones that struggle with these higher rates,” Emmett said.

“Up until recently ANZ spending data had remained very resilient, but we are starting to see a loss in momentum in recent weeks. That’s something we’re going to watch really closely, that these higher rates are weighing heavily on discretionary spending. The whole idea of tightening of monetary policy is it slows down demand.”