The Reserve Bank of Australia has acted to lift interest rates from emergency lows at its 3 May meeting to curb soaring inflation hitting households.
It’s the first time in more than a decade that the cash rate target has been increased, reinforcing expectations property prices will fall, particularly in Sydney and Melbourne.
Here’s what the move means for homeowners with mortgages.
What is happening with variable loans?
Monthly mortgage repayment increases will be relatively modest under the new rate rise of 0.35%. But the RBA governor, Philip Lowe, has warned borrowers should brace themselves for further hikes to bring inflation back into the target band.
Under the new rate, the monthly payment on a $600,000 home loan would rise to $2,324, an increase of $74, Finder said.
For someone with a $1m loan, repayments would rise by $130 a month.
But if the cash rate rises to 2% by May next year, as predicted by Westpac, RateCity said repayments for the average borrower with a $500,000 debt would rise by about $511.
CoreLogic research director, Tim Lawless, said under a 100 basis point lift in variable mortgage rates, a new borrower in Sydney would be facing a rise in monthly mortgage costs of $486. Under a 200 basis point rise, mortgage costs would be $1,005 higher than current levels.
Nationally, a 100 basis point lift would lead to a $323 rise in monthly mortgage costs, jumping to $668 under a 200 basis point lift.
“Past research from the RBA has pointed to ‘high end’ housing markets with higher investor concentrations being more sensitive to changes in interest rates in the short term,” Lawless said.
“This may be why Sydney and Melbourne markets are already seeing price declines, with more affordable housing markets expected to eventually follow the downward trend.”
What about fixed-rate loans?
Lawless said those on fixed-rate loans would temporarily be shielded from rate hikes, while the recent rise in fixed-term mortgage lending would help to insulate homeowners.
“While they will need to refinance down the track, by that time, labour markets are likely to have tightened further and income growth picked up,” he said.
Lawless said mortgage distress was likely to be further minimised to some extent by serviceability assessments at the time loans were delivered, and the fact borrowers were generally well ahead of repayments.
Senior editor of money at Finder, Sarah Megginson, said the rate rise, along with a cooling property market, would probably lead to further hikes in home loans.
“Some recent buyers may be caught out now – or when their fixed rate ends,” she said.
How will this affect property prices?
Lawless said the higher interest rates were likely to add further downwards pressure on housing growth rates.
He said major capital cities such as Sydney and Melbourne were already “losing steam” due to affordability constraints, higher fixed-term mortgage rates and lower levels of consumer sentiment.
“A higher cash rate implies higher variable mortgage rates, a reduction in borrowing capacity and tighter serviceability assessments for prospective borrowers,” he said.
Lawless said the extent of a housing market downturn depended on how high and how fast interest rates rose, on top of a variety of other economic factors.
“Such a low unemployment rate, along with an expectation for higher income growth, should keep mortgage distress and forced sales at relatively low levels,” he said.
