Between 1970 and 1990, interest rate hikes were a pervasive threat to households, with mortgage rates nearly tripling from around 6 percent to a high of more than 17 percent in 1990.

The next thirty years would bring almost the exact opposite.

Between 1990 and 2020, the RBA cut interest rates again and again, with interest rates falling from 17.5 percent in January 1990 to just 0.1 percent today.

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Instead of lying awake at night like their parents’ generation wondering if a rate hike would make their financial future even more difficult, the atmosphere for the current generation of mortgage borrowers is much more relaxed.

Instead of threatening the RBA with rate hikes and forcing households to tighten their belts, the RBA has cut rates every five months on average for the past three decades.

Mortgages and Interest Today

With the RBA cash rate now at a record low of 0.1 percent, there is simply no room for the Reserve Bank to cut rates any further without lowering the cash rate to 0 percent or below.

However, as mortgage holders ponder the possibility of never enjoying another rate cut at this level again, there is another temporary factor that has helped new mortgage owners and those who are refinancing.

The intervention of the RBA in the bond and bank finance markets.

At the height of pandemic concerns last March, the RBA announced its Term Funding Facility (TFF) to provide capital to banks.

In the months that followed, the RBA finally pledged up to $ 200 billion in financing for the banks at an interest rate of just 0.1 percent. This ultimately allowed banks to cut their financing costs and offer cheaper mortgages while maintaining a very healthy profit margin.

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At the same time, the RBA also introduced a yield curve control targeting three-year Australian government bonds, which are one of the main benchmarks for long-term bank borrowing costs.

As part of the policy, the RBA sought to ensure that the yield on three-year bonds did not rise above 0.25 percent until the policy was adjusted to a level of just 0.1 percent.

Taken together, the RBA and TFF’s interest rate curve controls have given banks ample leeway to extend loans at extremely low interest rates for selected fixed terms.

The average floating rate currently paid on existing mortgages is around 3.1 percent, according to the RBA. But there are three-year term loans from some of the big banks for only 1.69 percent.

But with the TFF now concluded and the announcement of adjustments to the RBA’s interest rate curve control program in the coming months, the currently record-low fixed-rate mortgage rates will not last forever.

Markets and what lies ahead

When rates go up depends entirely on who you ask.

In late June, the Commonwealth Bank (CBA) raised its forecast for the first RBA rate hike in more than a decade to November next year. CBA expects a 0.15 percent increase in November 2022, followed by a 0.25 percent increase in December.

On the flip side, the RBA continues to insist that it not hike rates until “at least” 2024.

The interest rate futures markets seem to be much closer to the CBA’s forecasts than the RBA’s.

A recent analysis by the US investment JP Morgan showed that the market for interest rate futures contracts will grow by around 0.4 percent in the next two years, by 1 percent in the next three years and by around 1.5 percent in the next four years .

It is important to remember that this is a snapshot of the current market view and not a concrete confirmation of what is to come.

Given the uncertainty that defines the current situation we find ourselves in together, it is possible that interest rates could turn out to be more, less or even negative, as was the case in several countries such as Switzerland, Japan and Sweden.

The future for mortgage holders

With record numbers of households benefiting from low interest rates and fixed-term mortgages, these households could find it harder in a few years if interest rates rise as the interest rate markets expect.

If interest rate hikes of 1.5 percent were factored into the current average floating rate, the average interest rate on a variable mortgage would rise to 4.6 percent per year.

For the average buyer who recently bought a home on an average mortgage of $ 504,000 and got a good 2 percent interest rate on a fixed-term mortgage, returning to an adjustable-rate loan as interest rates go up could more than double the interest payback an instant.

As a result, monthly repayments would increase by $ 722 per month, or 38.6 percent, and the household could run into financial trouble if it doesn’t quickly adjust its expenses to match new mortgage service costs.

With house prices currently soaring and markets increasingly seeing an inflationary future determined by rising interest rates, these two forces appear to be on a long-term collision course.

While it may take years for rates to rise and affect the market, it is also true that rising rates kept a generation of Australians awake at night for decades, and if the experts are right, we may return to that future.

Tarric Brooker is a freelance journalist and social commentator | @AvidCommentator