A Christmas cash crunch is on its way for many Australian homeowners, after the Reserve Bank of Australia (RBA) increased the cash rate for the eighth consecutive month at today’s December Board meeting.
The cash rate has hit a 10-year high of 3.1%, with RBA Governor Phillip Lowe confirming the 25 basis point increase.
“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. Returning inflation to target requires a more sustainable balance between demand and supply,” Mr Lowe said in a statement. “A further increase in inflation is expected over the months ahead, with inflation forecast to peak at around 8 per cent over the year to the December quarter.
“Inflation is then expected to decline next year due to the ongoing resolution of global supply-side problems, recent declines in some commodity prices and slower growth in demand. Medium-term inflation expectations remain well anchored, and it is important that this remains the case. The Bank’s central forecast is for CPI inflation to decline over the next couple of years to be a little above 3 per cent over 2024.”
It comes as Compare the Market’s latest research revealed half of Australians fear they won’t be able to afford rising mortgage payments within the next 12 months.
The data also revealed that just one-in-three Aussie mortgage holders have tried to negotiate a lower rate this year.
Amazingly, of those that did talk to their lender though, 70% said their rate discount negotiation was successful.
Compare the Market’s General Manager of Money Stephen Zeller said this goes to show how important it is to talk to your lender.
“Those who don’t ask, won’t receive,” Mr Zeller said.
“Aussie homeowners need to be looking at their rate and checking it twice this Christmas, otherwise they could end up paying thousands of dollars in extra interest over the life of their loan unnecessarily”.
As property prices fall and interest rates continue to rise, Mr Zeller said some people may now have to sell for less than what they bought for.
“Those on a fixed, or a climbing variable rate, need to wake up and act, especially with a large portion of fixed rates due to expire mid-next year,” Mr Zeller said.
“The rude reality is that fixed rates which are due to expire at the end of 2023 can expect a median increase of around $650 in their monthly repayments.
“It would be a good idea to start talking with your lender a couple of months before your fixed rate is due to end – just to see what the options are. If you’re not happy with the options available, you’ve got to shop around.
“There are plenty of deals out there, plenty of cash back offers to entice people across so you need to do your research and decide what’s best in terms of products and features.
“It’s not just about a cheap rate anymore, there are some great features available, but we know that generally, 95% of borrowers just want a basic home loan, they aren’t after those bells and whistles”.
Mr Zeller warned borrowers not to fall into the holiday lull.
“Be proactive and assess your current financial situation now – the value of your property, and the composition of your debt,” Mr Zeller said.
“It’s vital to do your research because advertised rates are moving fast.
“In the last month, we’ve seen some banks dramatically reduce their rates to new customers and that is becoming a real battleground”.
There will be some holiday reprieve though, with the likely 25 basis point increase to be the last of the year, before RBA meets again in February 2023.
For Australians on a variable rate home loan, below is how a potential 25 basis point increase in the cash rate, if passed on by the lender in full, would affect monthly repayments:
|Mortgage size||25 basis point increase to 5.25% p.a.|
|Increase in monthly minimum repayments||Increase over the life of the loan|
|Monthly repayments do not include any reduction in the mortgage balance over time. These calculations assume: An owner-occupied variable interest rate of 5.25% p.a; principal and interest (P&I) repayments; cash rate increases are passed on in full; the loan term is 30 years; and there are no monthly fees.|
Australians with a $600,000 mortgage could soon be paying $1,059 more each month than they were at the start of May, if there is a 300 basis point jump in just seven months.
|Mortgage size||Increase in average monthly repayments since the start of May (300 basis points)|
|Reserve Bank Lenders’ Interest Rates. Monthly repayments do not include any reduction in the mortgage balance over time. These calculations assume: An owner-occupied variable interest rate of 2.86% p.a; principal and interest (P&I) repayments; cash rate increases are passed on in full; the loan term is 30 years; and there are no monthly fees.|
“High mortgage borrowers, so mortgage holders with a Loan-to-Value ratio (LVR) around 90% or even 95% are the one most exposed to rising rates, especially if their wages are staying the same,” Mr Zeller said.
“If those mortgage holders are able to put more money into their home loan now, to get that LVR down, then you may have greater options to structure your debt. Whether you put any extra money into your home loan or save money for a rainy day in your offset account, that can give you a buffer against any future cash rate increases”.
Mr Zeller said it generally takes 90 to 120 days for cash rate increases to be felt against the household budget.
“You may be better off sacrificing the new TV for another 12 months and instead, pushing that money into your offset account or home loan. The RBA are in an almighty wrestle with inflation, and unfortunately, it is those that are most exposed that may be rushed into selling”.
For more information, please contact:
Natasha Innes | 0416 705 514 | [email protected]
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