Australians are bracing for another 0.25% rate hike to 3.60%, but the market is expected to be higher today. How long that lasts remains to be seen, with tomorrow’s Reserve Bank of Australia (RBA) decision set to have its biggest effect on spending yet.
ASX 200 futures are 0.9% higher at 7,298, however, it's Labour Day in WA today, so we expect a quiet day on the market.
Still, a green board is expected as the S&P 500 closed 1.6% higher on Friday, with the Nasdaq Composite Index leading the way at 2% stronger. The Dow Jones Industrial Average rose by 1.2%.
Here’s what we saw (source Commsec):
- The Euro rose from US$1.0589 to US$1.0637 and was near US$1.0630 at the US close.
- The Aussie dollar lifted from US67.34 cents to US67.74 cents and was near US67.50 cents at the US close.
- The Japanese yen rose from 136.74 yen per US dollar to JPY135.72 and was near JPY135.95 at the US close.
- Global oil prices rose by up to 1.9% on Friday. Prices fell by more than US$2 a barrel early in the session after a Wall Street Journal report said the UAE had held internal debates on leaving OPEC and pumping more oil. But the report was later denied by UAE officials and crude prices rebounded.
- The Brent crude oil price rose by US$1.08 or 1.3% to US$85.83 a barrel.
- The US Nymex crude oil price added US$1.52 or 1.9% to US$79.68 a barrel.
- For the week, Brent rose US$2.67 a barrel or 3.2% with the US Nymex up US$3.36 or 4.4%.
- Base metal prices were little changed on Friday. The copper futures price dipped 0.1% but the aluminium futures price added 0.1%. Over the week, copper was up 3.1% and aluminium gained 3.3% as strong economic data in top consumer China raised demand hopes.
- The gold futures price rose by US$14.10 or 0.8% to US$1,854.60 an ounce.
- Spot gold was trading near US$1,855 an ounce at the US close.
- Over the week, gold gained US$37.50 an ounce or 2.1%.
- Iron ore futures fell by US38 cents or 0.3% to US$126.64 a tonne.
- For the week, iron ore rose by US79 cents a tonne or 0.6%.
Australians in mortgage prison
As interest rates are set to rise further, more Australians will be trapped in a so-called mortgage prison – unable to refinance or get a better deal from their lender.
Data from Compare Club shows the number of people at risk of becoming mortgage prisoners in Australia has jumped by 42% since the RBA started increasing the cash rate.
The data is based on 6,725 home loan refinancing enquiries. It illustrates the percentage of Australians with an LVR (Loan-to-Value Ratio) of 91% or more has grown from 14% in April 2022 to 20% in Feb 2023.
Homeowners are being squeezed by several different pressure points on their mortgage, including:
- Nine successive Reserve Bank cash rate rises since May 2022.
- Declining property prices across Australia, pushing LVRs up, along with the risk of negative equity (when the loan is higher than the value of the property).
- A 3% serviceability buffer, where mortgage applicants are assessed at their ability to pay at 3% above the rate they’re applying for.
LVR measures the value of your property against the size of your loan and is used by banks to assess the risk of a loan, with a higher LVR representing a higher risk of default. An LVR above 80% often requires the homeowner to pay for Lenders’ Mortgage Insurance (LMI) when they refinance, which can run into tens of thousands of dollars, effectively locking the homeowner out of being able to refinance.
“The risk with highly leveraged loans in a falling property market, is that an Australian’s property’s value can fall below their loan amount, placing them in negative equity,” says Compare Club CEO Lance Goodman.
“Our data shows that the impact of the RBA’s consecutive cash rate hikes combined with a downturn in the property market has really started to kick in for households who, less than 12 months ago, could comfortably service their mortgage.
“Borrowers in a negative equity situation are prisoners of circumstance. Refinancing will be difficult unless a new bank values their home more highly than their current one or they have enough savings to pour back into their loan and reduce the capital amount. It’s particularly galling for these homeowners as they can see better rates and cashback offers from other lenders getting further out of reach.”
“We’ve also just seen the regulator opt to keep the serviceability buffer at 3% but many people who are rolling off cheap mortgages this year will have been assessed at their ability to pay at around 5%, when the reality is a lot of homeowners will be facing a rate of 6% or higher, which is far in excess of what their lender originally thought they could pay.
“The RBA estimates that 800,000 homeowners are going to roll off ultra-cheap fixed rates this year and many of these will be at risk of getting locked into mortgage prison. It’s why it’s vital to be proactive. Speak to your broker and speak to your lender to see what’s feasible. Most economists think there are more rate rises just around the corner, so it’s important to move quickly."