What will be the impact of this week’s rate rise on Aussie households?
At Tuesday’s (7 June) monthly meeting, the Reserve Bank of Australia (RBA) has decided to raise the cash rate by 50 basis points.
According to a number of experts, the RBA’s decision will compound the financial pressures Australians are currently facing, as food, petrol and general household costs such as gas and electricity continue to rise.
The latest increase, double the size of a typical rate increase, indicates the RBA is further behind on inflation, which rose by 5.1 per cent in the first three months of 2022, than initially thought.
PropTrack chief economist Paul Ryan said the cash rate hike signals the RBA’s concern about domestic inflation, which has been driven by a 6.6 per cent jump in “non-discretionary” household item prices throughout the year.
“The larger than ‘business-as-usual’ hike indicates the RBA is increasingly concerned about domestic inflationary pressures and has assessed that they need to increase rates quickly to get them under control,” he said.
Despite many Australians having gotten ahead on their mortgages and built significant savings buffers throughout the pandemic, Mr Ryan believes rising costs will still place financial pressure on households.
“You’ve got this incredibly fast inflation that’s increasing the price of groceries, energy and lots of essentials that people can’t substitute away from,” he said.
Refinancing set to increase with interest rates
For many Australians, the consequence of the cash rate increase will be a jump in their interest rates and subsequent higher mortgage repayments. RateCity has already reported that from 21 June, Westpac will pass on the 0.50 percentage point increase on to both new and existing customers.
This will result in the bank’s standard variable rate rising to 5.23 per cent, increasing repayments on a $500,000, 25-year loan by $143. The rate is yet to be passed on to any of Westpac’s savings accounts.
Research director at RateCity Sally Tindall said the banks' decision was unsurprising, with the expectation being the rest of the banks will follow suit.
“It is no surprise to see Westpac hike home loan rates by the full 0.50 percentage points. We expect the other big banks to follow Westpac’s lead and also pass on the RBA rate hike in full to their mortgage customers,” Ms Tindall said.
With the rising home loan rates will come an increase in the number of Australians looking to refinance. Data from Mortgage Choice highlighted that 41 per cent of all new loans submitted in May were for refinancers, an increase on the 38 per cent from the previous month.
This is supported by statistics from the Australian Bureau of Statistics (ABS), which revealed that April’s refinancing activity was up 19.2 per cent from the same time in 2021.
Mortgage Choice national sales director David Zammit believes the current climate of rising interest rates presents the perfect time for refinancing.
“Interest rates may be rising but there are still some great deals in the market and your broker can help you find them,” he said.
“With the cost of living rising rapidly, Australians will be questioning how to lessen the burden on their hip pocket, getting a better deal on your home loan is a great place to start.”
Similarly, the rest of the big four - the Commonwealth Bank, ANZ and NAB - have followed Westpac's lead in passing on the cash rate increase to variable-rate borrowers from Friday 17 June, one week earlier then Westpac.
All three banks have made the decision to introduce the rate hike to their select savings accounts across the board, citing the need to better support their customers savings during this tricky financial period.
Housing market will cool
Prior to the RBA decision yesterday, the Australian property market had already entered a “cooling” period, driven by declining values in Sydney, Melbourne and Canberra. And with such an aggressive rate hike, Mr Ryan anticipates this trend to continue moving forward.
“Housing price growth has slowed significantly, with annual price growth falling from 24 per cent six months ago to only 14 per cent in the year to May,” he said.
He said that buyers would be factoring in higher mortgage repayments into their decision making, especially considering the uncertainty that remains around how high interest rates could actually go, with many economists forecasting them to rest at between 1.35 per cent and 1.75 per cent by year’s end.
“There’s a lot of uncertainty for price growth because of higher interest rates, so people are bidding less aggressively than they have been last year, and we’re likely to see that continue,” he said.
“This higher-than-expected increase in the cash rate by the RBA will be taken cautiously by buyers and will likely impact sentiment.”
This coincides with new data released by CoreLogic, which has detailed how dwelling sales in the three months to May 2022 were down 19 per cent on the same time last year.
According to the research firm, “higher mortgage rates add further downside risk to values”.
Even so, property prices are still up 35 per cent nationwide since the onset of the pandemic back in 2020.