What you should do after the RBA's ninth rate hike

The Reserve Bank of Australia has hiked interest rates for the ninth consecutive time, making it even more important for borrowers to shop around for a better home loan deal.

At its February board meeting today, the RBA lifted the official cash rate by 25 basis points to 3.35% – its highest level since September 2012.

RBA governor Philip Lowe said winning the war against inflation remained a top priority.

“High inflation makes life difficult for people and damages the functioning of the economy,” Mr Lowe said in a statement.

“And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later.

“The Board is seeking to return inflation to the 2% to 3% range while keeping the economy on an even keel, but the path to achieving a soft landing remains a narrow one.”

Mr Lowe warned further rate rises could be needed in the months ahead to ensure inflation cools.

“In assessing how much further interest rates need to increase, the board will be paying close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market.”

The move was widely expected and PropTrack director of economic research Cameron Kusher said there was no other choice.

“Despite signs of a marginal easing in inflationary pressures, with the highest rate of inflation recorded in decades it was a pretty easy decision for the RBA to continue to increase interest rates this month,” Mr Kusher said.

December quarter inflation data showed a slower than expected 1.9% increase quarter-on-quarter, but the annual measure was up a whopping 7.8%.

“It would be difficult for the RBA to maintain credibility as an inflation-fighting Central Bank had they not continued to lift rates this month,” Mr Kusher said.

Mr Kusher believes relief is in sight, with signs that inflation might have peaked, which should see pressures will ease from here, he said.

“We’re already seeing a slowdown in growth in producer prices,” he said.

“Retail trade has shown early signs that it may have started to stall, while home prices continue to fall and demand for housing finance is continuing to slump.”

Mr Kusher believes one more interest rate rise of 25 basis points is likely this year, bringing the cash rate to 3.6%, at which point the RBA will sit tight.

However, a raft of economic data is due to come in before the board meets next in early March.

“Should the slowing continue and if economic growth comes in lower than expected, this might be the last of the hikes,” Mr Kusher said.

“Either way it appears we are nearing the end of the rate-hiking cycle.”

Borrowers should hunt for savings

Nine back-to-back rate hikes have put significant financial pressure on borrowers, Mortgage Choice chief executive Anthony Waldron said.

There’s little doubt that most lenders will be quick to pass on today’s rate hike in full.

“If you haven’t asked your mortgage broker to review your mortgage in the past 12 months, now is a great time to chat to an expert and start your year off on the right foot,” Mr Waldron said.

“I encourage all borrowers to take control of their home loans and be proactive about getting a better deal.”

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

Those with a mortgage balance of $750,000 will pay an extra $121 a month after today’s increase, while those with a $1 million loan balance will cough up an extra $161 per month.

But of course, the cash rate has already risen eight times before today.

Since May 2021, Aussies with a $500,000 mortgage could see the combined cost of the rate hikes total more than $960 per month – a staggering $11,556 more a year.

And for a borrower with $1 million outstanding on their home loan, the combined cost blows out to more than $1900 extra each month.

Full impact of nine rate rises

Note: 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.

Mortgage Choice home loan application data shows that the vast majority of borrowers are prepared to ride out the wave.

Demand for variable rate home loan products remains steady, with 94% of borrowers choosing this type of product over fixed rates in January, Mr Waldron said.

Impact on home prices

Soaring interest rates have seen mortgage costs skyrocket and borrowing power plummet, with housing markets across the country impacted as a result.

The latest PropTrack Home Price Index shows values nationally slipped 0.09% in January and are now 4.51% below their peak.

Some cities have been harder hit than others, with Sydney – the country’s most expensive market – seeing home prices fall 7.51% from their peak in February 2022.

PropTrack senior economist Eleanor Creagh, who authored the report, said the RBA’s aggressive approach to rates was largely to blame.

“However, the worst of the downturn appears to have passed,” Ms Creagh said.

“The rapid pace of price falls seen in June and July 2022 when interest rates first started rising have subsided and price falls have eased in recent months.”

And while prices nationally have dropped 4.51% from their peak, they remain a staggering 28.5% higher than they were pre-Covid.