Home owners with mortgages of $500,000 could face monthly payment increases of just under $1000 by the end of the year as the Reserve Bank hikes rates to curb inflation, according to Canstar.
With the RBA in a hawkish mood, next Tuesday’s board meeting could see another 0.5 percentage points added to the cash rate target.
That would feed into mortgage rates, pushing the average standard variable mortgage rate on a $500,000 loan up to 4.83 per cent. That, in turn, would see borrowers shelling out $2640 per month in repayments.
Not everyone sees the RBA pulling the 0.5 percentage point trigger at its meeting on Tuesday, with NAB and CBA believing the rise will be 0.25 percentage points.
But more hawkish ANZ and Westpac economists believe rates will continue to rise, with the RBA having put the cash rate up a full percentage point between May and year’s end.
CBA says we will only see a rise of 0.5 percentage points by year’s end, while NAB says it will be 0.75 percentage points.
But whatever happens, home owners will suffer.
If Westpac and ANZ are right, home owners with a $500,00 standard variable mortgage will see monthly repayment costs up $969. If NAB is right the rise will be $726 per month, and if CBA is right it will be $484.
Canstar chief commentator Steve Mickenbecker believes the RBA will go hard, with a 0.5 percentage point rise in October.
“I think they haven’t got any reason to track away from their recent comments and they’re still worried that the inflation genie will get out of the bottle,” he said.
That makes him nervous. “People could be up for $1000 more per month pretty soon and that’s a huge rise when wages are only growing at 3 per cent,” Mr Mickenbecker said.
Some believe the RBA is too trigger happy and a 0.5 percentage point rise in October is not warranted.
“People are getting themselves into a bit of a lather and saying ‘the rest of the world is going up faster and therefore now we should go up 0.5 percentage points’,” said independent economist Nicki Hutley.
Inflation in Australia is below its international peers.
“The US and the UK are in very different circumstances, and if I were the Reserve Bank board I’d be saying 0.25 percentage points is fine,” Ms Hutley said.
Pushing rates up a further 0.5 percentage points “risks overkill in my view”, she said.
“Retail numbers are holding up, but people are getting through their savings really quickly.”
At the beginning of the year RBA governor Philip Lowe said Australians had record savings levels of $280 billion. However, the savings rate has fallen from 19.8 per cent in June 2021 to 8.7 per cent in June 2022.
That, along with high retail spending, means savings are being eroded and not replaced, and spiking interest rates will combine with that to slug the economy, Ms Hutley said.
Regardless of the size of the RBA’s move on Tuesday, rates are on the move and people are feeling the pain.
“All the indicators [on home loan levels] are pointing downwards except for refinancing,” Mr Mickenbecker said.
That means rising rates are frightening home buyers away, and could see some people who bought in the last 18 months with negative equity as home prices fall, Mr Mickenbecker said.
“That will put people in the uncomfortable position of not having options to refinance, not having equity and having taken out big fat loans,” Mr Mickenbecker said.
What to do?
Refinancing could be a useful option for home owners who have been in the market for some time.
“If you go back five or 10 years the major banks were offering packaged loans with a discount of 0.7 per cent from the standard variable rate,” Mr Mickenbecker said.
Those packages included the loan, an offset account, a credit card and a transaction account.
The world has changed, however, and the average packaged mortgage loan now has an interest rate of 5.7 per cent across the big four banks.
That is well above an average standard variable loan with an offset account attached, which is 4.33 per cent.
“If you haven’t renegotiated with your bank and you have a packaged loan you are paying way too much – hundreds of dollars – so you need to do something about it,” Mr Mickenbecker said.
If you are in that position then contact the bank and seek refinancing.
Even with inflation on the rise and the economy likely to weaken “there’s certainly no reason to be panicking about the R word,” Ms Hutley said.
“If you’re worried about risks, I’d be more worried about inflation than recession at the moment.”
