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Mortgage holders warned to brace for higher interest rates
By John Collett
Higher inflation makes it more likely that variable rate mortgage holders will see minimum repayments rise, possibly as soon as the next meeting of the Reserve Bank of Australia in early August.
The inflation rate for the 12 months to May 31 was 4 per cent, above the expectations of markets. The annual inflation rate has increased every month since March this year and remains above the RBA’s target of 2 to 3 per cent.
More increases in interest rates and repayments could be on the cards for variable rate mortgage holders.
That may have put paid to any prospect of a cut in interest rates this year and could even prompt the central bank to increase the cash rate on August 6.
However, the June quarter inflation data – a more reliable read on inflation than the monthly number – will be released in three weeks and help better inform the RBA’s decision.
Shane Oliver, chief economist at AMP, says his base case remains that rates have peaked. “But the risk of another hike is high” and now expects the first cut to interest rates not to be until early next year.
Borrowers should start preparing their budgets for the possibility of not just one, but perhaps even two rate hikes before the end of this calendar year, says Sally Tindall, the research director at RateCity.
For an owner-occupier with a $1 million mortgage at the start of the interest rate rising cycle in early May 2022 with 25 years remaining on the mortgage, two more 0.25 percentage point increases would add $300 to monthly mortgage repayments.
RateCity figures also show that since early May 2022, and applying what was then the average variable mortgage interest rate of 2.86 per cent, the same owner occupier would have seen their monthly repayment rise by $2720.
Tindall says the wait-and-see approach has suited the RBA, but after five consecutive meetings that left rates on hold, it may find it difficult to stay on the sidelines.
She says that while the stage 3 tax cuts that took effect from July 1 might add to the case for a cash rate rise by increasing household consumption, “they’ll also serve as a lifeline for many borrowers if another one eventuates”.
Tindall says the stage 3 tax cuts could be put into a mortgage, either into an offset account or as extra repayments.
“Paying the extra money now will help build a buffer in your mortgage and reduce your interest bill,” she says. “A mortgage rate that starts with a ‘5’ will put you in good stead.”
RateCity’s database lists about 30 lenders offering variable rates under 6 per cent to owner-occupiers who are looking to refinance.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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