Reserve Bank set to double down on interest rate hike as borrowers brace for pain

The average mortgage borrower faces a cumulative $760 a month for their household budget if the Reserve Bank raises interest rates as scheduled today.

Most economists and financial traders are tipping the bank to offer another half-percentage-point rate hike at 2:30 p.m. AEDT.

Such a move would be the fifth consecutive 0.5 percentage point move by the RBA, taking its benchmark rate target to 2.85% from just 0.1% in early May.

For a fairly typical homeowner with half a million dollars in mortgage debt, the October increase would add $148 per month to their repayments, according to an analysis by RateCity.

In total, this mortgage borrower has reportedly seen monthly repayments jump by $760 a month since the RBA began raising rates in May.

The increase in monthly mortgage payments is double that of someone with a million dollar loan.

RateCity research director Sally Tindall says many existing customers are being charged much higher interest rates than new borrowers.(Dan Irvine, ABC News.)

“If the RBA pulls the trigger for another double hike, it would see the cash rate rise to its highest level in nine and a half years, while the average homeowner rate could climb to more than 5.5% “, said the research of RateCity. director Sally Tindall.

Interest rates are likely to rise even further from there.

While some financial institutions are tipping a maximum cash rate of 2.85%, such as the Commonwealth Bank, most others are tipping a peak above 3%, Westpac expects rates to reach 3 .6% by February, before being reduced by a percentage. peak in 2024.

Such a high cash rate spike would add nearly a thousand dollars a month to the repayments of a $500,000 home loan.

The debt frenzy ends

The surge in interest rates has already led to a dramatic decline in new borrowing for housing, which fell 8.5% in July and 11.3% from the same period a year earlier.

Melbourne-based mortgage broker Ali Kawser has experienced this change.

Mortgage broker Ali Kawser stands in front of a chalkboard and a furnished desk.
Mortgage broker Ali Kawser says he has less than half the job he did during the height of the home loan boom last year.(ABC News: Darryl Torpy)

He spent much of the last year working 14-hour days amid scorching demand for home loans as many interest rates were below 2% and the property market boomed.

But things have changed drastically since the start of 2022.

“Everyone started feeling that we had a rate hike coming very soon,” he said.

“Buyer inquiries and refinance requests started to slow down, and then, from March or April, they just went down.”

The individual entrepreneur can now do all his work every day in about six hours.

There is also a new type of client who comes to him for a refinance.

“Every time there’s a rate increase from the RBA, they get a letter that says your monthly reimbursement will go from that amount to that amount,” he said.

“When they get the letter, and they’re stretching their budget because inflation and groceries have gone up, so they come to us to reduce their reimbursement to get through this stressful time.”

Further analysis by RateCity shows that many of these people are smart about looking for a new loan.

The comparison website said increased discounts to new customers mean someone who took out their mortgage just six months ago is, on average, facing an interest rate 0.26% higher. percentage point to someone who has just taken out a loan.

This gap is much larger at 0.67 percentage points between new borrowers and those who have a two-year mortgage and have neither renegotiated nor refinanced their loan.

On a half-million dollar loan, that equates to about $190 a month in additional repayments.

“For many borrowers, it is neither practical nor profitable to switch lenders every few months, however, people should at least haggle with their bank whenever they offer a better deal to new customers,” said said Sally Tindall of RateCity.

“If you haven’t negotiated with your bank lately, pick up the phone and be that annoying customer. Your bank might turn you down, or they might just say yes.”

Another group of clients who are about to negotiate with their current lender or refinance or those with fixed loans, most of which are locked in at ultra-low interest rates, often below 2%.

“Some people with fixed rates aren’t stressed right now, but their fixed period will end sooner or later, and they’ll be in the same boat,” Kawser said.

Merrill Lynch Australia economist Tony Morriss said this could be a significant drag on the economy in the second half of 2023 as these borrowers feel the brunt of rising rates.

Most ultra-cheap pandemic-era fixed-rate mortgages are set to expire next year.
Most ultra-cheap pandemic-era fixed-rate mortgages are set to expire next year.(Provided: BofA Global Research)

“Up to half of all loans were fixed rate in 2021, typically around 2-3 years to maturity,” he noted.

“We estimate that up to a third of indebted Australian households are expected to experience significantly higher mortgage payments when these fixed mortgage rates return to floating during 2023.”

Interest rate hikes drive home prices down

Another interest rate hike is expected to put downward pressure on house prices, which CoreLogic figures showed fell a further 1.4% on average nationally in September.

Nationally, prices are down almost 5% from their most recent high, after rising an average of almost 29% during the COVID ultra-low interest rate period.

CoreLogic’s Eliza Owen said that if interest rates stop rising in early 2023, the housing market decline should bottom out in the first half of next year.

Eliza Owen, Head of Australian Research at CoreLogic, at her desk.
Australian head of research at CoreLogic, Eliza Owen, said a stabilization in interest rates could lead to a stabilization in house prices.(ABC News: John Gunn)

“We don’t know if this is a plateau or the calm before the storm,” she said.

“It’s actually a bit of a wait and see. We have extremely low supplier activity levels.

“Sellers aren’t really selling right now unless they have to, and that potentially helps isolate the decline.”

Kawser says what’s driving the drop is the effect of higher interest rates on the amount potential buyers are allowed to borrow.

“First-time buyers, they always want to buy property,” he told The Business.

“When we do maintenance, it’s significantly lower than what we did six months ago.

“So property prices are falling, yes, but at the same time their borrowing power is much lower than what we had six months ago.”

Neha Dahiya is an aspiring apartment buyer in Melbourne, after her landlords just raised her rent by $100 a week.

Neha Dahiya stands looking at a real estate ad.
Neha Dahiya started considering buying an apartment after her landlord raised her rent by $100 a week.(ABC News: Emilia Terzon)

“I want to buy now because I think prices are starting to come down and sellers are more reasonable,” she told The Business.

However, she called the interest rate situation “crazy”.

“I will not fix my loan. I will go variable at this point,” she said.

She added that whatever the RBA decides this month, it will take its time to search for the right property.

“I’m not going to rush. It’s a property, it’s a mortgage, it’s going to be there for 30 years,” she said.

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