RBA confirms further rate hikes likely

Borrowers should prepare for at least two, if not three, more cash rate hikes this year as the RBA continues to tame the inflation beast.

The Board minutes released today made it clear that inflation was still too high and that further increases in interest rates are likely to be needed over the months ahead to bring it back into the target range.

A further two hikes, as forecast by CBA and Westpac, in the next three months would take the cash rate to a peak of 3.85 per cent by May.

If this happens, the average variable borrower with a $500,000 debt at the start of the hikes could see their repayments rise by an extra $150 per month in the next three months, and a total of $1,058 extra per month since the start of the hikes – a 45 per cent increase in just over a year.

Impact of rate hikes if the cash rate gets to 3.85%

Source: RateCity.com.au. Based on an owner-occupier paying principal and interest with 25 years remaining. Starting rate is the RBA avg. existing owner-occupier variable rate of 2.86% in April 2022 and assumes Westpac’s cash rate forecast.

However, if the RBA increases the cash rate a further three times, as forecast by NAB and ANZ, that borrower could see their repayments rise by an extra $227 per month in the next three months, and a total of $1,135 per month – a 49 per cent jump from May 2022 to May 2023.

Impact of rate hikes if the cash rate gets to 4.10%

Source: RateCity.com.au. Based on an owner-occupier paying principal and interest with 25 years remaining. Starting rate is the RBA avg. existing owner-occupier variable rate of 2.86% in April 2022 and assumes NAB’s cash rate forecast.

RateCity.com.au research director, Sally Tindall, said: “The RBA minutes are further confirmation the Board is prepared to keep tightening the screws on households to get inflation back under control.”

“What was interesting to see in this month’s minutes, was that the RBA considered reverting back to a double hike in order to put a rocket under its efforts,” she said.

“Borrowers might have dodged a bullet, with just a 0.25 percentage point increase at the beginning of this month, but there are almost certainly more hikes coming.

“While the RBA has said it is working on a technical assumption of a cash rate peak of 3.75 per cent, borrowers can’t rule out the possibility official rates could climb even higher than this.

“If the cash rate gets to 4.10 per cent, as predicted by two of the big four banks, the average borrower with a $500,000 debt at the start of the hikes could soon be making monthly repayments of almost $3,500.

“It’s like a marathon that’s turned into an ultramarathon mid-race. The concern is some people won’t have enough left in the tank to keep up. 

“Find out what your repayments will be if the cash rate gets to 4.10 per cent. If this number doesn’t fit into your budget today, it’s time to start considering your options.

“Your bank may suggest switching over to interest-only repayments, or extending out your loan term, but know both of these options will come at a longer-term cost.

“Talk to your bank about your options but also get some independent financial advice as a second opinion. Your bank might not offer up a rate cut as a solution but as a loyal existing borrower you should absolutely ask for one.

“It’s one of the most effective ways to inject immediate ongoing relief into your budget, with no nasty sting in the tail,” she said. 

Options your bank may offer

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.

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