How the RBA's rate move will impact mortgagors

On Tuesday (4 October), the Reserve Bank of Australia (RBA) increased the official cash rate to 2.60 per cent.

The 25-basis-point hike marks the sixth month in a row that the cash rate has risen, and took the official cash rate to its highest level in nearly 10 years.

Following the move, lenders have already begun announcing rate changes to their loans, which will increase the cost of mortgages to borrowers.

According to several commentators, the rate increases could cost home loan borrowers thousands of dollars a year. 

CoreLogic's head of research, Eliza Owen, explained that assuming the 0.25 per cent cash rate rise (2.60 per cent) is passed on to mortgagors in full, the average variable mortgage rate for a new owner occupier loan could rise to around 4.76 per cent, up from 2.4 per cent in April, she warned.

For a new principal and interest loan of $750,000, this would take monthly mortgage repayments from $2,925 per month in April to $3,917.

“This scenario makes clear the impact of rising rates on buyer demand, with further mortgage rate rises through October likely to place additional downward pressure on the housing market,” Ms Owen stated.

“At 2.6 per cent, the cash rate target is now at the highest level since July 2013 - and surpasses the decade average prior to the onset of COVID-19 (which was 2.55 per cent).

“The current rate tightening cycle is the fastest since the early 1990s,” Ms Owen outlined.

Similarly, PEXA's chief economist, Julie Toth, has estimated that a typical housing mortgage balance of $500,000, the increase of 0.25 per cent will add a further $1,250 in annual interest payments, or $100 per month,” Ms Toth stated.

“Once fully implemented by lenders, the cumulative cash rate increase of 2.50 per cent so far this year will have added around $12,500 in annual interest payments, or $1,040 per month in additional interest payments to a typical loan balance of $500,000," she said.

Home Loan Experts CEO Alan Hemmings said the increase was not surprising as most economists had predicted a rate rise (although they were split on whether the hike would be a quarter or a half of a percentage point).

For existing mortgage customers, the 0.25 percentage point means an additional $70 per month in interest costs on a $500,000 mortgage, the brokerage CEO suggested.

“At the moment, variable interest rates start between 3.5 per cent and 4 per cent. We expect these rates to increase,” Mr Hemmings said, flagging that refinances will likely continue at record-high levels.

“As always, existing customers should check what happens with their interest rate after the lender passes on any increase.

PEXA similarly noted that refinances will continue to be popular - with Ms Toth adding that PEXA's own research suggests consumers can save an estimated $1,524 per year on average.

Indeed, recent research by PEXA Insights found that of Australia’s nearly eight million mortgage holders, an estimated 2.48 million, had refinanced their home loan in the past year and/or intended to refinance within the next two years.

Moreover, 71 per cent of mortgage refinancers told PEXA they were feeling ‘anxious about rising rates’.

Given the rapidity of changing rates, Mr Hemmings flagged that brokers would become increasingly popular with borrowers. He said: “On the property market, as prices continue to decrease we are seeing fewer properties coming on for sale and those on the market are taking longer to sell.

“For buyers, this may present an opportunity as sellers get a better understanding of the value of their property and lower their expectations.

“Anyone looking to buy should be aware of their borrowing capacity, as constantly rising interest rates reduce customers’ buying power," he warned, however.

“Speaking to a broker is important so that customers do not offer more than they can borrow,” he explained.

Indeed, even before this latest rate rise, the RBA recently calculated that the 225-bp increase in interest rates from May to August, “…will have reduced borrowers' maximum loan size by around 20 per cent.

”This will inevitably result in fewer people moving from renting to owning, and at lower average price points," it explained. 

Treasurer Jim Chalmers noted on Tuesday that the while the 25-basis-point increase was "a bit less than what many people were anticipating", it wouldn't "make it that much easier for Australians to find room in their household budgets to meet the increasing costs of servicing the mortgage".

"Ever since interest rates started rising before the election, it was clear from the independent Reserve Bank that there would be a number of interest rate rises. This is now the sixth in as many months and the statement from the Reserve Bank Governor today indicates that it's likely that there will be more interest rate rises as well," he noted.

Mr Chalmers highlighted that the federal Budget would be handed down in three weeks' time, and suggested that the three "most important pieces of context" for the budget that Treasury was currently finalising are:

• "high and rising inflation, rising interest rates and falling real wages";
• "the deteriorating global outlook"; and
• "persistent structural pressures on the Australian Budget in areas like health, NDIS and aged care, defence and the rising costs of servicing Commonwealth debt as interest rates rise".

[Related: 2.60% cash rate confirmed]