Even if the cash rate and loan interest rates do not move any higher in this monetary policy cycle, payments on household debt as a share of household income will continue to rise through 2024, the Reserve Bank said yesterday.
The latest RBA Statement on Monetary Policy, released with yesterday’s monetary policy decision, includes data on the flow-through of rate increases to households.
Interest payments on household debt, including mortgage debt and consumer credit, have increased by around 3.25 percentage points as a share of household disposable income over the tightening phase since May 2022, to around 7 per cent.
This is below the peak of more than 10 per cent during the financial crisis.
The RBA said interest payments on household debt would increase further to around 8 per cent of disposable income as expiring fixed-rate mortgages roll off onto higher rates and the November cash rate increase continues to flow through to mortgage payments.
Total payments on mortgages alone – interest plus principal repayments – reached around 10 per cent of household disposable income in the December 2023 quarter. This is a record high.
The RBA said rates on outstanding housing loans have increased by around 105 basis points less than the 425 bps increase in the cash rate over the hiking phase.
This gap is partly due to the high number of fixed -rate mortgages taken out at low rates during the pandemic. It also reflects strong competition for new and refinancing borrowers.
The average rate paid on deposit accounts has increased by 105 bps less than the total cash rate increase. This is in line with previous hiking periods. Rates on term deposits and conditional savings accounts have increased more than rates on other accounts.
Households have reduced their savings rates over the tightening phase to support consumption.
The RBA said: “Household deposits and other liquid assets remain large in aggregate, supported by the additional savings accumulated during the pandemic. This suggests there is scope for savings rates to decline further to support consumption.”
The RBA said the direct impact of cash rate increases on bank funding costs has run its course, with money market rates and the spread between bank bill swap rates and overnight indexed swaps little changed since the December board meeting. The spread of bank bond yields to swap rates has also been little changed.
If BBSW rates remain at current levels, bank funding costs are expected to plateau.