RBA delivers Cup Day rate hike

It’s shaping up to be a costly holiday season for households after the Reserve Bank of Australia delivered a seventh consecutive rate hike in November.

The RBA lifted the cash rate by another 25 basis points to 2.85% on Tuesday, the highest level in nine years, as it gallops to get inflation lower.

For households with a variable home loan, that almost certainly means yet another hit to their monthly mortgage repayments.

In a statement following the decision, RBA governor Philip Lowe said the rate increases aren’t over yet.

“As is the case in most countries, inflation in Australia is too high,” Mr Lowe said.

“The board expects to increase interest rates further over the period ahead.”

He said the size and timing of future interest rate increases will continue to be determined by economic data, the outlook for inflation and the labour market.

Inflation data released last week revealed the cost of living is growing at the fastest pace in more than 30 years, with everything from food to power, housing to furniture rising quickly.

According to the Australian Bureau of Statistics, the Consumer Price Index (CPI) rose by a stronger-than-expected 7.3% over the year to September – well above the RBA’s 2% to 3% inflation target.

That’s prompted the RBA to update its inflation forecasts, now tipping CPI will peak around 8% by the end of 2022, up from 7.75% previously forecast.

“The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that,” Mr Lowe said.

With interest rates rising at the fastest pace since 1994, PropTrack senior economist Eleanor Creagh said the property market had stalled.

According to the latest PropTrack Home Price Index, national property prices are now sitting 3.53% below their March peak.

“From here, further rate rises will increase borrowing costs and reduce maximum borrowing capacities, weighing further on prices,” Ms Creagh said.

“However, this will be offset by tight rental markets and rental price pressures, rebounding foreign migration, low unemployment, and housing supply pressures.”

Households brace for Christmas crunch

Not only is the cost of household essentials like food and power going up, but at the same time, borrowers with a variable home loan are seeing their mortgage repayments rise sharply.

Mortgage Choice chief executive Anthony Waldron said lenders were expected to waste no time in passing on the latest rate hike.

“While last month saw a smaller-than-expected rate increase from the RBA, most lenders moved quickly to pass on the cash rate rise to their customers and I suspect this month will be no different,” Mr Waldron said.

For borrowers with $500,000 outstanding on their home loan, the November hike could add an additional $80 to their monthly mortgage repayments.

But the cash rate has already risen six times before now.

Since May, the combined cost of the rate hikes could add up to more than $800 per month.

And for a borrower with $1 million outstanding on their home loan, the combined cost blows out to more than $1,600 extra a month.

Here’s how much the rate hikes so far may have cost an average borrower

In these calculations, the borrower is assumed to be an owner-occupier paying principal and interest with 30 years remaining on their loan. It assumes an initial average variable interest rate of 2.86%, according to April RBA figures. It assumes each rate hike is passed on in full. The calculation does not factor in loan fees and charges, or any principal paid down over time.

While the higher interest rates haven’t dimmed consumer spending so far, that may be about to change.

According to CBA, there is on average a three month lag between each rate hike and the time it takes to hit a borrower’s repayments.

That means the full impact of the recent rate hikes will flow through to household budgets over the months ahead, coinciding with the holiday spending season, and at a time when inflation is expected to peak.

Mr Waldron said more than ever, borrowers should stay on top of their home loan interest rate to ensure they’re still getting a good deal.

“As we approach the end of the year, I urge all borrowers to take stock of their financial position, to ensure they’re starting 2023 on the right foot,” Mr Waldron said.

“Those who haven’t had their home loans reviewed this year and those looking to buy in the coming months should speak to their broker to ensure they understand how the rising interest rate environment will affect them.

“We continue to see some lenders offering significant discounts on new loans, making it more important than ever for borrowers to stay on top of their home loan interest rate and ensure they’re still getting a good deal.”