RBA hikes cash rate again as savings buffers "pretty much exhausted"

The Reserve Bank of Australia (RBA) increased the official cash rate by 25 basis points to 3.35% at its February board meeting, amid fears that many Aussie borrowers are reaching the end of their savings buffers. 

After a reprieve from home loan rate hikes over the new year period, Aussie home loan borrowers are facing yet another hike to their variable rate loans, with the RBA board raising the cash rate at its first meeting of the year.

The RBA hiked the cash rate eight times in 2022 as a means of getting soaring inflation in line, and banks and lenders were quick to raise their own home loan rates each time, making the average variable rate mortgage much more expensive than this time last year.

As home loan variable rates continue to climb, there are increasing concerns about how much longer the average Aussie borrower will be able to withstand the rate hikes.

How could the cash rate hike affect your mortgage?

Following this latest RBA cash rate hike, it’s likely that major banks and lenders will also raise their own home loan variable rates, so Canstar Research crunched the numbers to find out how much more the average borrower might expect to repay.

We also looked at how much more expensive the average variable rate mortgage might be now compared to what it was in April of last year, the last month before the current round of cash rate hikes.

Source: www.canstar.com.au – 07/02/2023 Monthly repayment calculations based on a loan repaid using principal & interest repayments over a total loan term of 30 years at a loan-to-value ratio (LVR) of 80%. Repayment calculations interest rate based on a starting rate of 5.73% (average owner occupier variable rate pre-May cash rate of 2.98% with May, June, July, August, September, October, November and December cash rate increases applied). Repayments rounded to the nearest whole dollar.

Fears Aussies have burned through their savings buffers

The most recent Australian Bureau of Statistics (ABS) figures show that Australia’s household saving ratio – a measure of household savings divided by household disposable income – declined from 8.3% to 6.9% in the September quarter, the fourth consecutive decline.

According to ABS analysis, this past year saw Aussies spending at higher levels, as well as facing increases in home loan interest repayments, which detracted from household savings levels around the country.

At the height of the pandemic, amid travel restrictions and lockdowns, many Aussies managed to put some money away in savings, but the high inflation, price rises at the supermarket and petrol pump and rising interest rates that followed have eaten into these funds.

In fact, James Forbes, general manager consumer at credit bureau Equifax, said that the savings many Aussies built up during the pandemic have now been “pretty much exhausted”.

Speaking with Mortgage Business, Mr Forbes said that Aussie borrowers are becoming more conscious about tightening their belts and planning budgets carefully in anticipation of tough times ahead.

“All those savings that people put away because they weren’t travelling or doing things – they’ve been used up now,” he said, raising concerns about challenging times ahead.

RBA warns of two years of belt-tightening ahead

While there is no telling how high rates will rise, the RBA’s recent Financial Stability Review painted a picture of how things might look for households in years to come.

The review found that, if the cash rate rises to an anticipated peak of 3.6%, just over half of households who are currently paying off variable rate mortgages will see their spare cash flow fall by more than 20%.

More concerningly, the review found that 15% of owner-occupiers may find themselves with “negative cash flows”, and may be forced to draw on their savings in order to meet home loan repayments and pay for essentials like groceries and utilities.

The RBA added that, while a “relatively small” share of households appear to be at high risk of falling behind on repayments, many borrowers may need to tighten their belts for several years to come.

“Most borrowers will likely be able to manage for at least two years by reducing their non-essential spending, reducing their saving flows and/or drawing down on their accumulated prepayment buffers,” said the RBA.

“Should labour and housing market conditions deteriorate further than assumed in the Bank’s central scenario, however, a larger share of households would be expected to fall into arrears on their mortgages.”

Recent RBA figures show that borrowers at particular risk include those who took out two-year fixed rate mortgages at record low rates during the early part of 2021, who could see their repayments jump significantly higher when these fixed rates expire.

Are you thinking about switching home loans?

If you’re looking for a low fixed or variable rate for a new home loan or a refinance, you can compare home loans with Canstar to see if you can find a lender offering a deal that meets your needs and circumstances.

If you’re considering refinancing from a variable rate to a fixed one, it may also be worth considering the pros and cons of fixing your home loan, and considering the current interest rates on home loans to see how fixed and variable rate loans stack up.

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