RBA delivers back-to-back double-sized rate hikes

Households with a variable rate home loan will see their monthly repayments rise again, after the RBA raised the nation’s official cash rate for a third straight month¹.

Since May, interest rates have risen from a record low of 0.1% to 1.35%, potentially adding hundreds of dollars to monthly repayments for an average sized home loan.

In a statement following the July meeting, RBA governor Philip Lowe signalled further rate hikes are on the way.

“Today's increase in interest rates is a further step in the withdrawal of the extraordinary monetary support that was put in place to help insure the Australian economy against the worst possible effects of the pandemic,” Mr Lowe said.

“The board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead.

“The size and timing of future interest rate increases will be guided by the incoming data and the board's assessment of the outlook for inflation and the labour market.”

PropTrack senior economist Eleanor Creagh said the decision to raise interest rates by a larger-than-usual 50 basis points in both June² and July, following a 25 basis point increase in May³, signalled the RBA was committed to doing what is necessary to rein in inflation pressures.

“The board have clearly signalled that the RBA will front-load rate hikes and the tightening cycle,” Ms Creagh said.

“A consecutive 50bp hike at today’s meeting has reaffirmed this determination and the RBA’s desire to “get ahead of the curve” hiking more aggressively in a bid to tame inflation.

“Certainly for existing mortgage holders [with a variable home loan], housing affordability will get worse in the period ahead as repayments become more expensive with rising interest rates.”

Housing slowdown accelerates

Higher interest rates – and the expectation that they will continue to rise – has hit property prices, according to the latest PropTrack Home Price Index.

It found property prices fell for a second straight month in June⁴, with the sharpest falls seen in Sydney and Melbourne.

Nationally, property prices are down 0.55% from their peak in March, however Ms Creagh said home prices could fall by around 10-15% as borrowing capacities fall.

“Mortgage rates have moved higher, and many can no longer borrow the same amount as this time last year,” she said.

“In addition, as interest rates are expected to continue to rise, prospective buyers not only face higher borrowing costs but have a lot more uncertainty around future borrowing costs than those over the past two years.”

She said this has also been reflected in market activity, with buyer demand moderating and lower auction volumes, clearance rates and sales volumes.

“But I think it is important to put that in context, we have seen extraordinary growth in housing prices over the last two years, with home prices up 34% on pre-pandemic levels,” Ms Creagh said.

Cost to households

Lenders have been quick to pass on the rate hikes to their variable loan customers, either partially or in full, and the July decision is expected to be no different.

Analysis using the Mortgage Choice home loan repayment calculator estimates the combined three rate hikes will add around $429 a month for a household with a $615,000 mortgage, which was the average new home loan size in May according to the Australian Bureau of Statistics⁵.

For borrowers in Australia’s most expensive state, NSW, the additional monthly cost for the average $781,000 mortgage adds up to around $544.

Here’s a snapshot of what the latest interest rate hikes could cost borrowers with an average new home loan size.

Source: ABS lending indicators average new home loan size (seasonally adjusted); May 2022
In this calculation, the borrower is an owner occupier paying principal and interest with 30 years remaining on their loan. It assumes an average variable interest rate of 2.86%, according to April RBA figure. The calculation does not factor in loan fees and charges, or any principal paid down over time.

Mortgage Choice national sales director David Zammit said many borrowers would be nervously waiting to see if their lender passes on the latest rate hike in full.

“While today's cash rate increase from the Reserve Bank was widely expected by the market, Australian households will now be cautiously waiting to see how our nation’s lenders respond, especially as most lenders have already substantially increased rates on variable and fixed rate home loans in line with that market expectation,” Mr Zammit said.

Refinancing activity has been trending higher since the start of the year, ABS lending data shows⁶, with $17.1 billion worth of home loans switched to a different lender in May – just shy of the record high $17.2 billion recorded in August 2021.

Mortgage Choice data shows that trend has continued, with refinancing accounting for 43% of all loans submitted in June, compared to 38% in April.

However, further hikes to fixed mortgage rates has caused most borrowers to opt for a variable home loan, over fixed.

“With the market assuming that interest rates will rise at a rapid pace over an extended period of time, it has meant that fixed rates have accelerated far higher, far quicker than variable rates,” Mr Zammit said.

“In a changing rate environment, it’s particularly important to have someone proactively managing your home loan to ensure you’re not paying more than you need to be. Now is the time to speak to your broker and find out if you could be getting a better rate.”