An expert is warning home owners to prepare for the full impact of a 50-basis point hike today (5 July) and to further brace for more hip-pocket pain to come as the central bank beefs up efforts to rein in inflation.
With the Reserve Bank of Australia widely expected to dole out back-to-back half-percentage point interest rate hikes at its July meeting, RateCity research director Sally Tindall warned that Aussies should prepare for the “steepest RBA hikes since 1994”.
During its monthly board meeting on Tuesday, 7 June, the central bank, led by governor Philip Lowe, aggressively moved to lift the cash rate from 0.35 per cent to its current rate of 0.85 per cent.
“Variable-rate borrowers should prepare for another 0.50 percentage point hike this month and potentially another double hike in August,” she said.
Ms Tindall described the potentially hawkish RBA direction as a “bold move” but said it was not entirely in a different vein from the course of action taken by other central banks around the world to combat inflation.
Crunching the numbers under a 0.50-percentage point rate hike scenario, RateCity estimated that the average owner-occupier with $500,000 debt and 25 years remaining would see their repayments rise by $137.
The comparison site further estimated that the same mortgage holder’s total increase to date — adding up the May, June and July hikes — would tally up to $333 a month.
For those with a loan size of $1 million, the repayment figures could climb to as high as $665 under the scenario.
If the central bank chooses to be more dovish with its tightening cycle and hand out a 25-basis point rate hike, RateCity says the same mortgage holder with a $500,000 loan balance will still need to deal with a notable increase in repayments.
“If the RBA increases the cash rate by just 0.25 percentage points, their repayments will rise by $68 a month, with a total increase from April – July of $264,” RateCity estimated.
For those holding a $1 million debt, monthly repayments could clock in at $529 under the 25 bps hike scenario, according to RateCity’s calculations.
Experts also warned that home buyers should not expect that financial hits from the rate hikes would end tomorrow.
RateCity cited Westpac’s economics team, which has forecast that the cash rate could increase to 2.35 per cent by the end of this year and hit 2.60 per cent by early next year.
“The cash rate is forecast to increase by 2.5 percentage points in less than a year. For the average borrower with a $500,000 loan that’s a $685 monthly repayment increase,” Ms Tindall calculated.
From her perspective, “governor Lowe might have poured cold water on suggestions the cash rate could get to 4 per cent by Christmas, but the RBA is still likely to rip the band-aid off quickly”.