On Tuesday 3 May, the RBA finally announced their heavily telegraphed rate rise. The rise is the first since 2010 and took the base cash rate from 0.10 to 0.35: an increase of 0.25%.
What does the decision mean for home owners?
It’s safe to assume that the banks will pass on the rate increase in full. In that case, home owners can expect an increase in their monthly repayments of around $65 on a loan of $500,000. According to the ABS, the average home loan size in June 2021 was $555,964. For first home owners, it was $453,579.
Debbie Ettridge, National Manager of Elders Home and Commercial Finance says the rise was inevitable. “The cash rate has been at record lows for some time now, and there was really no way to go but up. I think most home buyers would have been cognisant that rates were likely to rise and have factored that in.”
Further rises are expected, with strong indications from Reserve Bank Governor Philip Lowe. The combination of higher-than-expected inflation rates and a tight labour market have signaled that it’s time to move away from emergency lows.
“This is what I think is really important to remember,” says Debbie. “Rising interest rates are a sign that the economy is strong and buoyant. The jobs market is very healthy, with low and falling unemployment and wage increases starting to show through.”
How high will rates go?
Without a crystal ball, nobody quite knows. However, most experts are tipping a series of rises over the next couple of years. Markets are pricing in a June rise as near-definite, with the median prediction landing on a jump of 0.4 to yield a cash rate of 0.75.
With mortgage levels at an all-time high, very few people expect big jumps to happen all at once: what’s more likely is that the RBA will take a slow-but-steady approach that gives people time to adjust.
Of the major banks, the NAB predicts small steady rises over the next 24 months, peaking at 2.6% in mid-2024. ANZ thinks the rate could get above 3%, but ‘not for some time.’ CBA believes a smaller rise is more likely, with four more small increases to get the cash rate to 1.6% by February next year and then a plateau.
Why (most) mortgage holders shouldn’t be worried
It depends on your situation, but for most of us, the rise won’t make much of a dent. Australians homeowners built up a war chest of $250bn in savings over the last two years, in large part because pandemic conditions made spending more difficult.
Debbie also urges mortgage holders to remember that the bank has already decided you can absorb a fairly significant rate rise. “When you apply for a loan, the bank looks at your ability to repay even if rates go up,” she explains. “Historically, banks have factored in a 2.5% interest rate rise, so if the interest rate offered on a loan is 3%, the bank checks that you could still meet your repayments if the interest rate rose to 5.5%. Last October, APRA got even more cautious and required banks to increase that interest rate buffer to 3% above the offered rate. So, most households can feel pretty confident that they’ll be able to keep paying their mortgage even with further rate rises.”
However, it never hurts to keep an eye on your budget. Get ahead of any future rises by revisiting your spending and see if there’s anything you can cut out. In many cases, you’ll find there are things you won’t even miss, like unused subscriptions or impulse purchasing habits. Check that you’re getting the best deal you can on utilities and insurance policies and make simple switches like bringing your daily coffee from home.
If your home loan is more than a couple of years old, it’s a great idea to check in with a mortgage broker or other finance specialist. “Banks don’t reward loyalty, unfortunately, so if you haven’t refinanced recently you may not be getting the best deal,” says Debbie. “Check in with an Elders home loan specialist for a home loan health check and we may be able to save you a significant amount of money. We’ll look at whether you’re on the best rate you can be getting and whether fixing the rate makes sense in your situation. We take a holistic view of the products on offer and look at what’s going to save you the most money. By being proactive about your home loan, you open up opportunities that really make a difference to the bottom line.”