Inflation rate hits 7.3%: what does this mean for the cash rate and your home loan?

Inflation has reached a record not seen since the 1990s, according to the latest figures released by the Australian Bureau of Statistics (ABS). This could spell bad news for mortgage holders across the country.

The consumer price index rose by 1.8% in the three months to September 2022, lifting the annual inflation rate to 7.3%. 

The ABS reported that the sharpest rises were found for new dwelling purchases by owner-occupiers (up 3.5%), gas and other household fuels (up 10.9%) and furniture (up 6.6%). All of which have been triggered by ongoing global supply chain delays and materials shortages, as well as the Russian invasion of Ukraine impacting global fuel and energy prices.

This time last year, the annual rate of inflation was just 3% - the target inflation rate for the Reserve Bank of Australia (RBA). Since then, inflation has continued to increase, which has pushed the RBA to lift the cash rate by a series of consecutive hikes from May 2022 to now. The cash rate is now sitting at 2.60%.

But for millions of Australian homeowners, today’s latest inflation data may indicate that the RBA is not done increasing the cash rate.

What rising CPI means for your home loan

• Interest rate hikes may continue

When inflation rises faster than expected, past the RBA’s target inflation range of 2-3%, it may indicate that a cash rate hike is necessary. 

There are numerous macroeconomic factors that influence the RBA’s decision to hike the cash rate. However, today’s inflation data may be all the central bank needs to increase rates again at its meeting in November. For home loan customers, this may mean that higher mortgage repayments are not done yet.

Given that a higher inflation environment means homeowners are already feeling the pinch on their household budgets, the impact of further interest rate hikes could be severe, and cause significant financial stress.

When interest rates on credit products are higher, such as your home loan, consumers and businesses are less likely to borrow funds, therefore decreasing spending. When spending decreases, the theory is that this can help to slow Australia’s economic growth, and therefore slow down inflation. This is why the RBA typically hikes the cash rate in the face of quickly rising inflation levels.

Whether the RBA will hike by 25 basis points in November, or dish out another double hike of 50 basis points, it’s hard to tell. Unfortunately, inflation rates are expected to continue to increase, potentially peaking at 7.75% by Christmastime. This means that the RBA may continue to lift the cash rate for some time.

• Property price declines may continue

The other side effect of a higher rate home loan environment is that it puts downward pressure on property prices. 

Recent CoreLogic data showed that almost 80% of the house and unit markets analysed by its Mapping the Market tool saw values retreat over the September quarter. Further, CoreLogic’s Home Value Index shows that dwelling values across the combined capitals declined by 4.3% over the September quarter.

Homeowners who recently borrowed amounts at the very edge of their budget could find themselves with a property worth less than the outstanding value of their home loan, meaning they have negative equity.

The risk of being in negative equity is that you will not be able to access any equity you’ve paid into the home via a line of credit or home equity loan. You may also find it difficult to refinance your home loan as you could need to pay significant Lender’s Mortgage Insurance (LMI) costs, or simply not qualify at all.

As inflation continues to rise and more pressure is placed on household budgets, this could see homeowners find themselves in ‘mortgage prison’, unable to refinance. Or worse, at risk of defaulting on the home loan.

Steps to take to give your budget some breathing room

Chances are you’ve already been feeling the pinch from higher inflation for some time. Cost of living pressures are significant on Australian families, with recent ABS data showing a trip to the supermarket now costs 9% more than it did a year ago. Fruit and vegetables also cost 17% more over the same period.

If your home loan interest rate is likely to rise again this year, it may be worth taking steps to give your budget some breathing room now. This may include

1. Increasing your income – It’s easier said than done, but finding a way to boost your income is one way to get ahead of cost-of-living pressures. Whether this means taking on more responsibility at work and asking for a pay rise, creating a side hustle from your hobby, or considering freelance work outside of office hours, any extra cash you can accrue should help.
   
   
2. Making extra repayments – If your home loan allows you to make additional payments towards your mortgage without penalty, doing so now could help you chip away at your principal owing. This may reduce your mortgage repayments and the total interest charged on your home loan.
   
   
3. Asking for a rate cut – Discover what rates new customers are being offered, and pick up the phone and ask your current lender for a rate cut. Use our helpful guide to negotiating a home loan rate, including an easy-to-follow script.
   
   
4. Considering refinancing – If you have equity in your home and you’re in a healthy financial position, it may be worth considering refinancing to a lower-rate lender. Keep in mind there are some costs associated with refinancing.

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