Full impact of higher interest rates hasn’t been felt yet

According to RBA estimates, household interest payments jumped from 5.1% of disposable income in Q1 to 6.9% last quarter and we expect them to reach 12.5% by end-2023. With household debt around record highs of 189% of disposable income, each 1%-pt increase in interest rates lifts household interest payments by around 1.9%-pts. And due to the usual lags between changes in the cash rate and adjustments to mortgage payments, the full impact of the rapid increase in the RBA’s cash rate in recent months has yet to be felt. What’s more, around 35% of households have fixed-rate mortgages and around 60% of those will expire by the end of next year. Admittedly, some of the surge in interest payments will be offset by lower principal payments and higher interest income on households’ holdings of deposits, which have reached a 25-year high of 60% relative to household debt. Even so, it’s clear that households are facing a rude awakening at a time when real disposable incomes are falling and the savings rate is nearly back at pre-virus levels.