Mortgage rates starting with a ‘4’ to largely disappear on back of today’s RBA hike

The Reserve Bank has today increased the cash rate by 0.25 percentage points to 3.60 per cent, the highest level since May 2012.

In the Governor’s statement today, the RBA has confirmed this is unlikely to be the cash rate peak, despite an acknowledgment that many households are experiencing ‘a painful squeeze’.

The Governor did, however, change his language. In February, he said ‘further increases in interest rates will be needed’. Today’s statement says ‘further tightening of monetary policy will be needed’.

If lenders pass on the 0.25 percentage point hike, as expected, the average owner-occupier with a $500,000 loan and 25 years remaining will see their repayments rise by $77.

If this happens, there is likely to be less than 10 ongoing variable rates starting with a ‘4’.

0.25% hike: Increase in monthly repayments

Source: RateCity.com.au. Based on an owner-occupier paying principal and interest with 25 years remaining. Starting rate is the RBA av. existing owner-occupier variable rate of 2.86% in April and assumes banks pass the hikes on in full.

Today’s 0.25 percentage point rate increase is the tenth consecutive hike, the highest consecutive number on record.

The second longest run of cash rate changes was in 2008 to 2009, when the RBA cut the cash rate five times in a row.

After this hike, RateCity.com.au estimates:

• The average existing owner-occupier variable rate will be 6.36%, for people who haven’t haggled since the start of the rate hikes.
• A competitive variable rate is expected to be around 5% for owner-occupiers paying principal and interest.
• There is likely to be less than 10 ongoing variable rates starting with a ‘4’.

How much can variable borrowers save by refinancing?

If someone with a $500,000 debt today and 25 years remaining on their loan refinanced from the average variable rate to one of the lowest in the market, RateCity estimates they could save up to $12,401 in the next two years. This includes the costs of refinancing and assumes the cash rate moves in line with NAB’s forecast.

Potential savings by refinancing

Based on an owner-occupier switching from the average rate of 6.36% to a rate of 5%. Includes switching fees.

Source: RateCity.com.au. Notes: based on an owner occupier paying principal and interest with 25 years remaining on their loan. Assumes borrower is on the estimated average owner-occupier variable rate of 6.36% and moves to one of the estimated lowest variable rates on the RateCity.com.au database. Includes switching costs and assumes the cash rate continues to move in line with NAB’s forecasts.

RateCity.com.au research director, Sally Tindall, said: “This is the longest consecutive run of rate changes we’ve seen in Australian history, with no clear sign the Board is preparing to pull up stumps.”

“The second longest run was back in 2008 and 2009 when the Board cut the cash rate a total of five times in a row,” she said.

“The tenth hike in as many meetings means Australians can largely kiss goodbye mortgage rates starting with a ‘4’.

“After this latest hike washes through, a small handful of lenders are likely to hold on to rates just under 5 percent, but we’re likely to be able to count these loans on two hands.

“Meanwhile, the average owner-occupier who hasn’t renegotiated since the start of the hikes will be on a variable rate of 6.36 per cent.

“This latest hike is going to pack a punch for many families, who could be forced to make some tough decisions.

“For some families who’ve already made every cut back possible, it could be the hike that forces them to pick up the phone to the bank for help.

“Refinancing can be a silver bullet for the family budget, but only for those in a position to switch.

“A borrower who can switch from 6.36 per cent, down to a rate of around 5 per cent can reverse more than five standard RBA hikes just by refinancing.

“Imagine winding back the clock to around September of last year, when the budget was starting to get tight but still broadly manageable. That’s the type of relief refinancing can potentially bring.

“Borrowers who aren’t in a position to refinance because they don’t have enough equity in their loan or can’t meet the banks’ serviceability tests at today’s rates can still negotiate a rate cut from their existing bank.

“You might not get as big a discount, but haggling can still bring genuine, immediate relief to your budget,” she said.

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