Another rate rise….what does it mean?

05th Jul, 2022 | Articles, First Home Buyer, Refinance, Self employed

In this article:
The Reserve Bank of Australia (‘RBA’) has announced another 0.5% raise in the official cash rate, leaving it at 1.35%

The Reserve Bank of Australia (‘RBA’) has announced another 0.5% raise in the official cash rate, leaving it at 1.35%.

In a statement about the considerable raise, the RBA said:  “Inflation in Australia is high, but not as high as it is in many other countries. Global factors account for much of the increase in inflation in Australia, but domestic factors are also playing a role. Strong demand, a tight labour market and capacity constraints in some sectors are contributing to the upward pressure on prices. The floods are also affecting some prices.”

A key factor in determining whether rates continue to rise will be “the behaviour of household spending,” the RBA stated in its press release.

“The recent spending data have been positive, although household budgets are under pressure from higher prices and higher interest rates. Housing prices have also declined in some markets over recent months after the large increases of recent years. The household saving rate remains higher than it was before the pandemic and many households have built up large financial buffers and are benefiting from stronger income growth. The Board will be paying close attention to these various influences on household spending as it assesses the appropriate setting of monetary policy.”

How does this affect borrowers?

After today’s announcement, if lenders were to pass on the 0.5% increase to their home loan products, this would mean an increase of $27.44 per month, per $100,000 borrowed, in terms of minimum monthly repayments over a 30 year loan term. For example:

  • Repayment increase on a $400,000 loan = $109.76
  • Repayment increase on a $600,000 loan = $164.65
  • Repayment increase on a $800,000 loan = $219.53

    It’s another painful hit for those with existing mortgage repayments, but as Stephen Koukoulas explained on Property Insights this week, this is all part of an aggressive strategy by the RBA to curb rising inflation. For Koukoulas, he feels the RBA is trying to give Australian mortgage owners their “medicine upfront.” 

    “By getting the bad news upfront, it means that when we get to the end of this year, or the middle of 2023, the RBA won’t have to” continue hiking rates as much as they have been.

    The extraordinarily low Interest rates that Australians have had access to in recent years were ’emergency settings’ in response to a once-in-one-hundred year pandemic.

    Essentially the RBA has recognised that the emergency rates we’ve experienced over the past two years has contributed to excessive demand within the economy. Coupled with supply issues and external, unexpected shocks (e.g. the war in Ukraine), these issues have led to inflation increasing well beyond desired levels. 

    Rate increases are meant to tighten people’s belts. The RBA is trying to dial down how much people have had to spend to help with rising inflation. 

    By increasing interest rates the RBA is attempting to achieve two outcomes:

    1. Encourage people to save more money with more attractive interest rates for savings accounts.
    2. Reduce disposable income for those who have borrowed.

    Both of these purposes take heat out of the demand side of the equation, with the cumulative effect of easing the pressure on inflation.

    What a mortgage broker can do for existing mortgage owners

    Now is the perfect time to start a conversation with your mortgage broker, if you haven’t already. There are a number of ways a broker can guide you through the current environment, to help you manage increasing mortgage repayments. 

    Crucially, a broker can look at your current mortgage and assess whether you’re getting a fair go. They can shop around by looking to their diverse lending panel to see if you can get a better interest rate by refinancing, meaning you may save on your monthly repayments. 

    A broker can also help you strategise to save in the long run. Simple steps by changing your repayment schedule, paying in more, or accessing certain loan features can play a critical role in reducing the size of your monthly repayments. 

    An added benefit is that the work of a mortgage broker is generally paid for by the lender via a commission when the broker settles a deal, meaning you won’t be out of pocket in most circumstances. A mortgage broker is not someone looking for a one-off transaction. They are with you throughout your home loan journey, and continue to guide you on strategies to pay off your mortgage sooner, even after the settlement of your loan. Consider reaching out to us today to see whether you’re getting the most out of your current home loan.

    What a mortgage broker can do for prospective borrowers

    In a rising rate environment, borrowing money becomes more difficult, as you will generally be able to borrow less. Working with a mortgage broker can help you understand the complicated and competitive home loan market.

    Not only can a broker shop around and provide you with options for the most suitable home loan deal, they can explain the various measures available to support first home buyers, such as stamp duty concessions and government grants.

    If you have any questions about your existing home loan, or you’re looking to break into the property market and are concerned about today’s news, reach out to us today to start a conversation!

    Learn how much you can save through refinancing.

    Related Articles