How to get ahead of rising rates as the first 2023 RBA hike kicks in

Australians with a CBA, NAB or ANZ variable home loan will see their interest rate rise by 0.25 percentage points today, as the RBA’s February hike takes effect.

Westpac variable mortgage customers will see their rates rise from Tuesday (21 February).

The average owner-occupier with a $500,000 debt at the start of the hikes and 25 years remaining on their loan will now see their repayments rise to $3,243 – that’s a $908 increase (39 per cent) since May.

While borrowers will be charged the higher rate of interest from today, for many customers, the extra money will only start coming out of their bank accounts from April.

Big four banks lowest new customer variable rates – post February RBA

Source: RateCity.com.au. Notes: rates are for owner-occupiers paying principal and interest. LVR requirements apply on some rates. NAB rates are based on a loan size of $500,000.

More pain on the way

Yesterday, ANZ announced it now expects the cash rate to peak at 4.10 per cent by May, up from its previously forecasted peak of 3.85 per cent.

The bank now predicts three more standard rate hikes in March, April and May of this year, followed by at least one cut to the cash rate, but not until November 2024.

As a result, two of the big four bank economic teams, ANZ and NAB, now expect the cash rate to peak at 4.10 per cent, along with Deutsche Bank Australia.

Big four banks’ current economic forecasts

What will mortgage repayments look like if the cash rate gets to 4.1%?

For someone with a $500,000 loan at the start of the hikes, their monthly repayments could rise to $3,469 by May of this year.

That would be a total increase to their monthly mortgage repayments of $1,135 – a 49 per cent increase.

Impact on the average borrower if the cash rate reaches 4.10%

Source: RateCity.com.au. Based on an owner-occupier paying principal and interest with 25 years remaining. Assumes borrower has not renegotiated their loan since the hikes began and that mortgage rates rise in line with ANZ and NAB’s cash rate forecast.

How to get ahead of rate hikes

Borrowers whose budgets are unlikely to hold up against this rate hike – or the forecasted future hikes – should take action now.

1. Refinance the mortgage – potential annual savings: $13,319

The average owner-occupier who has not renegotiated their loan since the rate hikes began is on an estimated rate of 6.11 per cent.

However, RateCity.com.au expects at least 10 lenders will still offer rates under 4.75 per cent once this latest hike filters through. That’s a 1.36 percentage point difference, equivalent to over 5 standard RBA hikes.

If a borrower with $500,000 owing at the start of the hikes refinanced to a rate of 4.75 per cent, they could save $13,319 over the next two years and significantly more over the longer term.

Refinancing savings over next 2 years

Based on an owner-occupier with a $500,000 debt at start of hikes

Source: RateCity.com.au. Notes: based on an owner-occupier paying principal and interest, with 25 years remaining in April 2022 on a variable rate loan, switching to one of the lowest variable rates in the market. Costs include switching fees and future rate changes as forecasted by ANZ.

2. Focus on your food bill – potential annual savings: $5,720

For most families, food is the second biggest expense behind the mortgage repayments or rent, which makes honing down on your food bill a strategy worth trying.

Households can do this in a range of different ways from buying in bulk, to shopping at two or more supermarkets to capitalise on specials, or simply switching to cheaper brands within your regular store.

RateCity.com.au put this to the test on a typical supermarket shop for a family of four of around $240, excluding fruit and vegetables. Swapping 23 items for cheaper, but still comparable alternatives saved around $110 on the weekly grocery shop.

3. Drive down transport costs – potential annual savings: $908

Transport costs are the third biggest expense for many households, after the mortgage or rent and food. 

For a quick cash injection, selling a second car could potentially see you pocket tens thousands of dollars. However, if this isn’t an option, think about shopping smarter when it comes to loading up the tank.

On average, Australians spend $96.93 filling up the car each week, according to the Australian Automobile Association. However, being mindful of where you fill up can potentially save you hundreds over the course of a year.

RateCity tested this out by comparing the unleaded price per litre across hundreds of petrol stations in each capital city. The price ranged by $0.16 from the average cost to the lowest cost outlet, and up to $0.33 per litre.  

For the average driver filling up their tank once per week, saving $0.16 per litre would save $454 per year at the pump, while a $0.33 per litre discount would equate to a $908 saving per year.  

3. Increase your income – potential annual post-tax increase: $3,843

Asking your boss for a pay rise will see your income go up without having to work longer hours.

If you haven’t had a salary increase recently, now is the time to ask. According to the RBA, wages growth is forecast to rise to 4.25 per cent late this year.

For a family of four, where one parent earns the average full-time wage and one parent works part time at half the rate, a wage increase of 4.25 per cent could translate into approximately $3,843 in post-tax dollars.

While this kind of increase isn’t within cooee of inflation, it will help partially offset the cost of rising rates.

Potential cash injection from a pay rise

Based on a family where one parent earns the average full-time wage, and the other works part time at half the wage

Source: RateCity.com.au. Notes: Based on the full-time adult average weekly ordinary time earnings with one parent working full time and one earning half this amount, part time. Assumes a wage increase of 4.25%.

Other options your bank may offer

If you’re struggling to meet your mortgage repayments, it’s important to talk to your bank before you default. They will help you look over your budget, but may also offer you options such as switching to interest-only or part-payments, or, extending out your loan term.

While these choices can offer instant relief in the form of lower repayments, borrowers should be aware of the longer-term sting in the tail that can come with these alternatives.

Extending out your loan term

If someone with a $500,000 debt and 25 years remaining on their loan term at the start of the hikes extended their loan term back out to 30 years today, their repayments would reduce by an estimated $265 a month.

However, paying the loan off over a longer period of time could add an estimated $126,562 dollars in extra interest over the life of the loan.

Source: RateCity.com.au. See notes below.

Switching to interest-only repayments for 2 years

Switching to interest-only payments instead of paying down your debt can drop your repayments dramatically, despite the fact the bank is likely to charge you a higher rate of interest for doing so.

If someone with a $500,000 loan at the start of the hikes, switches their loan from principal and interest to interest-only repayments for the next two years, on a rate that is 0.56 percentage points higher than their current rate, they could shave $514 off their monthly repayments.

However, it could see their total cost over the life of the loan jump by $22,279.

Source: RateCity.com.au. Notes: based on an owner-occupier with a $500,000 debt and 25 years remaining at the start of the hikes. Assumes rates rise in line with cash rate and cash rate forecasts from ANZ.

RateCity.com.au research director, Sally Tindall, said: “Many households will need to start battening down the hatches, if they haven’t already, as the ninth RBA hike hits millions of mortgages from today.”

“Australians have broadly taken these hikes on the chin so far, but with inflation at 7.8 per cent, and the cash rate at a decade long high, many family budgets are now under extreme pressure,” she said.

“From food and petrol, to mortgage repayments, everything’s on the rise, but with a bit of tenacity and some old-fashioned penny pinching, borrowers can start to hose down inflation in their own domain.

“If you haven’t given your mortgage the once over in the last 12 months now is the time to do so.

“People often think they’re on a competitive rate, until they see what else is on offer.

“Food is the second biggest drain on household budgets, but a few tweaks to the way you shop could deliver thousands in savings over the course of a year.

“Buying in bulk, shopping for specials at different supermarkets or even just switching to cheaper brands within your usual store can deliver surprising savings without too much additional effort.

“And while no-one wants to drive across town, burning petrol in a quest for cheaper petrol, being mindful of when you fill up can go a long way if you tally the savings up over the course of a year.

“If you’re on the brink, pick up the phone to your bank before you hit the wall.

“Banks have hardship programs in place and are at the ready for those who need it. The key is to ask early.

“It’s also worth getting some independent financial assistance which the National Debt Helpline can provide for free,” she said.

Resources for people in financial stress:

1. National Debt Helpline: 1800 007 007
2. Good Shepherd no interest loans
3. Services Australia Payment and Service Finder
4. State-based resources:
   1. Service NSW Savings Finder
   2. Service Victoria Savings Finder
   3. Queensland Govt Concessions Finder
   4. SA Govt Concessions Finder
   5. Concessions WA
   6. Concessions NT
   7. Tasmanian Govt Discounts and Concessions
   8. ACT Savings Finder

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