Smaller RBA cash rate rise offers hope to borrowers

In recent months, Aussie banks and lenders have largely passed on each cash rate hike to their variable rate home loan customers in full. It’s likely this will happen again in October, which means that even with this smaller-than-usual rate rise, home loan borrowers will still end up paying more.

With this in mind, Canstar has crunched the numbers to find out how much today’s rate rise could affect a hypothetical borrower’s monthly home loan repayments.

We considered how much more a hypothetical home loan borrower making principal and interest repayments on a variable rate loan with a loan-to-value ratio (LVR) of 80% might be spending each month following the current rate rise, as well as the total amount monthly repayments might have increased since April of 2022, before the current round of cash rate hikes commenced, when the average variable home loan rate on Canstar’s database for this type of loan sat at 2.98%.

The below calculations show how much more a borrower with a $500,000, $750,000 and $1,000,000 home loan might expect to pay each month, assuming their mortgage is on that average variable rate and that their lender has passed on each of this year’s cash rate hikes in full (and made no other rate changes).

How much more could a $500,000 home loan be since April?

• 25 basis point rate rise: $78 more in monthly repayments, and $730 total since April.

• 25 basis point rate rise: $117 more in monthly repayments, and $1,095 total since April.

• 25 basis point rate rise: $155 more in monthly repayments, and $1,460 total since April.

Source: www.canstar.com.au – 27/09/2022. Based on owner occupier variable loans on Canstar’s database, available for a loan amount of $500,000, 80% loan-to-value ratio (LVR) and principal & interest repayments; excludes first home buyer only loans but includes introductory loans. May interest rate obtained from Canstar Database as at May 2, 2022. Current rate based on May rate with the cumulative cash rate increases up to September 7 applied.

RBA determined to fight the “scourge” of inflation

During a September speech, RBA governor Philip Lowe admitted that the pace of inflation in the Australian economy had caught the central bank somewhat by surprise, and suggested there would need to be at least two more cash rate rises in order to contain it.

“The board expects that further increases in interest rates will be required over the months ahead,” he said.

“But how high interest rates need to go and how quickly we get there will be guided by the incoming data and the evolving outlook for inflation and the labour market.”

“The magnitude of the pickup in inflation has come as a surprise to everyone,” he said, adding that high inflation is a “scourge” on the economy.

“It damages our standard of living, creates additional uncertainty for households and businesses, erodes the value of people’s savings and adds to inequality,” he said.

“And without price stability, it is not possible to achieve a sustained period of low unemployment.”

The fact that today’s 25 basis point rise is lower than the previous four increases of 50 basis points could be a sign the RBA believes its policy of hiking rates to try and curb inflation is starting to have an effect.

Big banks predict rate rises will cool off from here

Australia’s big four banks – ANZ, CommBank, NAB and Westpac – have all predicted that the RBA’s rate rises will continue to cool into the new year. The majority have also predicted that rate rises will pause for at least a few months if not all of 2023, before eventual rate cuts in 2024.

Based on these forecasts by the big four banks, we may expect to see the cash climb to a peak of 3.35% by early next year. If this happens, Canstar analysis shows that the average variable home loan rate on our database could rise to 6.12% before the RBA puts rate rises on hold.

To put this into perspective, this means that by the time rates hit their presumed peak, our hypothetical Aussie with a $1,000,000 mortgage on that average variable rate could see their monthly repayments climb to as much as $6,073.

In a September statement, Philip Lowe said he was confident many households had build up “financial buffers” to combat rising rates. Even if rates plateau in early 2023, though, some finance experts fear mortgage stress could be a concern for many.

Canstar finance expert Steve Mickenbecker recently warned that as many as 500,000 Aussies who signed on to fixed rate mortgages in 2020 or 2021 could face a “cliff” when their fixed terms expire.

He warned that these borrowers could see their rates double “overnight” when they reach the end of their fixed rate period.

If you’re currently nearing the end of your fixed rate term, or even if you are just considering your options around refinancing your home loan, you can compare home loans with Canstar to see if you can find a lender offering a deal that meets your needs and circumstances.

What are the lowest rates on Canstar’s database?

If you’re considering refinancing your home loan or switching to a new provider, Canstar’s research team has found the lowest rates on our database, current as of 4 October 2022, before the next presumed round or home loan interest rate rises. Below is a table representing the lowest current variable rate home loans on our database, along with the comparison rate: