The RBA is "prepared to keep tightening the screws" to control inflation, RateCity expert says
Borrowers should prepare for at least two – and possibly three – more cash rate hikes this year as the Reserve Bank continues to combat inflation, according to RateCity.
On Tuesday, the RBA board released minutes that indicated inflation was still too high and further rate hikes would likely be needed to lower it into the target range.
Two further rate hikes in the next three months, as predicted by Commonwealth Bank and Westpac, would take the cash rate to 3.85% by May, RateCity reported.
In that case, the average variable-rate borrower with a $500,000 debt at the start of the rate hikes could see their repayments spike by an extra $150 per month in the next three months, and a total of $1,058 extra per month since rates began rising in May 2022 – a 45% rise in just over a year.
Impact if cash rate reaches 3.85%
|
Loan size at start of hikes |
Monthly repayments by May 23 |
Increase in next three months (today - May 23) |
Increase since start of hikes |
|---|---|---|---|
|
$500,000 |
$3,393 |
$150 |
$1,058 |
|
$750,000 |
$5,090 |
$225 |
$1,587 |
|
$1 million |
$6,786 |
$301 |
$2,117 |
Source: RateCity. Based on an owner-occupier paying principal and interest with 25 years remaining. Starting rate is the RBA average owner-occupier variable rate of 2.86% in April 2022 and assumes Westpac’s cash rate forecast.
If the central bank hikes the cash rate another three times, as forecast by NAB and ANZ, the average borrower could see their repayments rise by an extra $227 per month in the next three months, and a total of $1,135 per month – a 49% increase – since the hikes began.
Impact if cash rate reaches 4.1%
|
Loan sie at start of hikes |
Monthly repayments by May 23 |
Increase in the next three months (today - May 23) |
Increase since start of hikes |
|---|---|---|---|
|
$500,000 |
$3,469 |
$227 |
$1,135 |
|
$750,000 |
$5,204 |
$340 |
$1,702 |
|
$1 million |
$6,939 |
$453 |
$2,269 |
Source: RateCity. Based on owner-occupier paying principal and interest with 25 years remaining. Starting rate is the RBA average owner-occupier rate of 2.86% in April 2022 and assumes NAB’s cash rate forecast.
“The RBA minutes are further confirmation the board is prepared to keep tightening the screws on households to get inflation back under control,” said RateCity research director Sally Tindall. “What was interesting to see in this month’s minutes was that the RBA considered reverting back to a double hike in order to put a rocket under its efforts. Borrowers might have dodged a bullet, with just a 0.25-percentage-point increase at the beginning of the month, but there are almost certainly more hikes coming.”
The RBA has said it is working on a technical assumption of the cash rate peaking at 3.75%, but Tindall said borrowers couldn’t rule out the possibility of rates climbing even higher.
Read next: Philip Lowe “not beyond criticism,” says Treasurer
“If the cash rate gets to 4.10%, as predicted by two of the big four banks, the average borrower with a $500,000 debt at the start of the hikes could soon be making monthly repayments of almost $3,500,” she said. “It’s like a marathon that’s turned into an ultramarathon mid-race. The concern is some people won’t have enough left in the tank to keep up.”
Tindall recommended that borrowers find out what their repayments would be if the cash rate hits 4.1% – and, if that number doesn’t fit into their budget, to start considering their options.
“Your bank may suggest switching over to interest-only repayments, or extending out your loan term, but know both of these options will come at a longer-term cost,” Tindall said. “Talk to your bank about your options, but also get some independent financial advice as a second opinion. Your bank might not offer up a rate cut as a solution, but as a loyal existing borrower you should absolutely ask for one. It’s one of the most effective ways to inject immediate ongoing relief into your budget, with no nasty sting in the tail.”
Options your bank may offer
- Extending your loan term: If someone with a $500,000 debt and 25 years remaining on their loan term at the start of the hikes extended their term out to 30 years today, their repayments would be reduced by an estimated $265 per month, RateCity said. However, paying off the loan over a longer period of time would add an estimated $126,562 in interest over the life of the loan
- Switching to interest-only repayments for two years: Switching to interest-only payments can drop repayments significantly, despite the fact that the bank is likely to charge a higher interest rate for doing so, RateCity said. If someone with a $500,000 loan at the start of the hikes switches to interest-only repayments for the next two years, at a rate that is 0.56 percentage points higher than their current rate, they could reduce their monthly repayments by $514. However, their total cost over the life of the loan would rise by about $22,279
Have something to say about this story? Let us know in the comments below.
