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Mark Bouris told Sky News that he expects the Reserve Bank of Australia (RBA) to raise the official cash rate by a further 0.5% in August. Speaking to Peter Stefanovic the morning after July’s 0.5% cash rate increase, Mark pointed out that the RBA said something “which they’ve never said before: they remain committed to getting the inflation rate back down to the range of 2% to 3%.”
“They also made it pretty clear that they’re expecting a 6% inflation rate come the end of July. So I think the August RBA meeting might see another half of a percent increase, for sure.”
What does this mean for borrowers?
Unfortunately for new borrowers in the market, for every 0.5% increase in interest rate, a lender is generally willing to lend 5% less, said Mark.
He pointed out that over the last three months, we’ve had three rate rises, increasing the official cash rate by a total of 1.25%, “so generally speaking…[most lenders] are prepared to lend 12% less to the average borrower.”
Naturally that means a borrower “has 12% less to pay when it comes to purchasing a property”.
Mark said, “There is a lot of increased pressure on borrowers, particularly first home buyers, and it seems to be, from the statistics that are coming out at the moment, those people that have borrowed in the last 18 months, are feeling the greatest impact, unless of course, they took a fixed rate 18 months ago…those people will feel the impact in about 18 months time.”
Is it too late to opt for a fixed rate?
You may be thinking that opting for a fixed rate home loan could save you money. Mark was quick to point out an old saying in lending, “a fixed rate never out performs a variable rate over five year period, and it’s funny, I thought it was going to this time around, when fixed rates were at sub-2% [over the last two years], but here we are again in the rate rise period and variable rates are probably going to outperform fixed rates.”
“Fixed rates are currently north of 5% for 2 and 3 year [fixed rate products], and I would say by the end of this calendar year, fixed rates are going to be north of 7% for two and three year rates.” So it seems as though any savings in fixed rate offers have been missed.
Whilst it may be a stressful period, context is relevant here. The official cash rate is at 1.35%. It was only three years ago, in May 2019, that the official cash rate was also 1.35%. The problem for existing mortgage owners, particularly those who took out their loan in the previous two or three years, is that extremely low rates encourage individuals to borrow larger amounts.
As Mark said, “If you look at the amount of money that Australians have borrowed, over the last 3 years, we have borrowed a lot of money.”
“There is a cohort of people, who are probably thinking to themselves, ‘wow, this is going to be pretty expensive for me for the next few years.’ But this is a game. You’ve got to game it. We get our cheap periods, we get our expensive periods, but my guess is, probably in 18 months time, we’re going to see interest rates either flatten out or come back.”
With interest rates expected to rise again next month, there’s never been a more important time to have a mortgage broker in your corner, who ensures you get a fair deal from your lender. Reach out to us today to start a conversation with one of our experienced mortgage brokers!