How a 50 basis point hike could impact borrowers

To Tuesday (June 7) monthly meetingthe Reserve Bank of Australia (RBA) decided to raise the key rate by 50 basis points.

According to a number of experts, the RBA’s decision will add to the financial pressures Australians currently face as food, petrol and general household costs such as gas and electricity continue to rise.

The latest increase, double the size of a typical rate increase, indicates that the RBA is further behind inflation, which rose 5.1% in the first three months of 2022, than one did not initially think so.

PropTrack chief economist Paul Ryan said the rise in cash rates signals the RBA’s concern over domestic inflation, which was driven by a 6.6% rise in household goods prices “non-discretionary” throughout the year.

“The larger than ‘status quo’ rise indicates that the RBA is increasingly concerned about domestic inflationary pressures and felt it needed to raise rates quickly to bring them under control,” he said.

Although many Australians have gotten ahead of their mortgages and built up large savings reserves throughout the pandemic, Mr Ryan believes rising costs will still put financial pressure on households.

“You have this incredibly rapid inflation that’s driving up the price of groceries, energy, and a lot of necessities that people can’t substitute for,” he said.

Refinancing expected to rise with interest rates

For many Australians, the consequence of rising interest rates will be an increase in their interest rates and subsequent higher mortgage repayments. RateCity previously reported that starting June 21, Westpac will pass the 0.50 percentage point increase on to new and existing customers.

This will result in an increase in the bank’s standard variable rate to 5.23%, which will increase repayments on a $500,000 loan over 25 years by $143. The rate has yet to be passed on to any of Westpac’s savings accounts.

RateCity director of research Sally Tindall said the bank’s decision was not surprising, with other banks expecting the rest of the banks to follow suit.

“It’s no surprise to see Westpac raise home loan rates by 0.50 percentage points. We expect other major banks to follow Westpac’s lead and also pass on the RBA rate hike in full to their mortgage customers,” Ms Tindall said.

With rising home loan rates will come an increase in the number of Australians looking to refinance. Data from Mortgage Choice highlighted that 41% of all new loans submitted in May were to refinancers, up from 38% the previous month.

This is corroborated by statistics from the Australian Bureau of Statistics (ABS), which revealed that refinancing activity in April increased by 19.2% compared to the same period in 2021.

Mortgage Choice National Sales Manager David Zammit believes the current climate of rising interest rates is the perfect time to refinance.

“Interest rates may go up, but there are still good deals out there and your broker can help you find them,” he said.

“With the cost of living rising rapidly Australians will be wondering how to ease the burden on their hip pocket, getting a better deal on your home loan is a great place to start.”

The housing market will cool

Prior to the RBA’s decision yesterday, the Australian property market had already entered a period of ‘cooling off’, driven by falling values ​​in Sydney, Melbourne and Canberra. And with such an aggressive rate hike, Ryan predicts that trend will continue.

“Housing price growth has slowed significantly, with annual price growth falling from 24% six months ago to just 14% in May,” he said.

He said buyers would factor higher mortgage repayments into their decision-making, especially given the continued uncertainty over how high interest rates will be, with many economists predicting they will be between 1.35% and 1.75% by the end of the year. .

“There’s a lot of uncertainty about price growth due to higher interest rates, so people are bidding less aggressively than they were last year, and we’re probably going to see it will continue,” he said.

“This higher than expected cash rate increase by the RBA will be taken with caution by buyers and will likely impact sentiment.”

This coincides with new data released by CoreLogic, which detailed how home sales in the three months to May 2022 were down 19% from the same period last year.

According to the research firm, “higher mortgage rates add further downside risk to values.”

Even so, house prices are still up 35% nationwide since the pandemic began in 2020.

RELATED TERMS

Base

The basis is the price of a property or its total investment cost for tax purposes.

Points

– duplicate, see discount points

How a 50 basis point hike could impact borrowers



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Last update: June 08, 2022

Posted: Jun 09, 2022