Borrowers hit for six as Reserve Bank strikes again
The Reserve Bank of Australia (RBA) has lifted interest rates for a sixth consecutive month with a 25 basis point increase at its October board meeting.
The decision means that the new cash rate of 2.60% is the highest it's been since July 2013, with Reserve Bank governor Philip Lowe once again citing inflation concerns as one of the primary issues responsible for today's hike.
"As is the case in most countries, inflation in Australia is too high. Global factors explain much of this high inflation, but strong domestic demand relative to the ability of the economy to meet that demand is also playing a role.
"Today's further increase in interest rates will help achieve a more sustainable balance of demand and supply in the Australian economy. This is necessary to bring inflation back down. The Board expects to increase interest rates further over the period ahead."
Mortgage costs set to jump
Now that the RBA has handed down its latest decision, the attention of the country's mortgage holders will shift to their respective lenders and the fate of their home loan interest rates.
According to financial comparison website Mozo, 15 lenders have passed on all five of the Reserve Bank's previous rate hikes in full (275 basis points) to their customers since May, though the average rate for an owner-occupier in the Mozo database hasn't taken quite as large a hit - rising 191 basis points to 4.93% over the same period.
So how much would today's 25 basis point rise add to the monthly cost of a mortgage if it was passed on in full? Here are a few scenarios based on the increase being added on to the current Mozo average.
| Loan size | Monthly repayments (4.93%) | Monthly repayments (5.18%) |
| $200,000 | $1,313 | $1,340 (+$27) |
| $400,000 | $2,625 | $2,680 (+$55) |
| $600,000 | $3,937 | $4,020 (+$83) |
| $800,000 | $5,249 | $5,360 (+$111) |
| $1,000,000 | $6,561 | $6,700 (+$139) |
Despite the likelihood of another round of rate rises there may be a bright spot for some borrowers, as those in a position to refinance their home loan could potentially save thousands of dollars a year by making the switch says Mozo personal finance expert, Claire Frawley.
"While refinancing might seem like a massive undertaking, especially as rates are expected to continue to rise, it is a great way to soften the burden of higher interest rates and inject some extra cash into household budgets."
Property price downturn marches on
Mortgage rates may be rising, but home values are heading in the opposite direction according to new data from CoreLogic.
The property research firm's latest Home Value Index, which was released on Monday, shows that national home values retreated by -1.4% during September, led by capital city drops in Sydney (-1.8%), Brisbane (-1.7%) and Canberra (-1.6%).
While the latest reduction in the national home value isn't quite as large as the -1.6% drop recorded in August, CoreLogic research director Tim Lawless believes that it's still too early to say whether the downward cycle has peaked.
"It's possible we have seen the initial shock of a rapid rise in interest rates pass through the market and most borrowers and prospective home buyers have now 'priced in' further rate hikes. However, if interest rates continue to rise as rapidly as they have since May, we could see the rate of decline in housing values accelerate once again."
Where to next?
As was the case following the September Reserve Bank decision, plenty of experts are once again predicting that the RBA will start to ease the size of its cash rate increases, or pause altogether, when it conducts its next monitory policy meeting on November 1.
In a recent survey conducted by comparison website Finder, 59% of the economists and experts polled predicted that the Reserve Bank would hold the cash rate at 2.60% next month.
"I expect the RBA to pause its tightening cycle in November," says head of institutional research and asset allocation at Ord Minnett, Malcolm Wood.
"With fiscal tightening from [Treasurer] Jim Chalmers' first budget, Europe in recession and the US soon to follow, this should end the tightening cycle."
The central bank will also have fresh inflation data from the September quarter to mull over when it next meets, courtesy of the Australian Bureau of Statistics' Consumer Price Index which will be released on October 26.
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