Rate hikes coming, with or without the RBA

The RBA is not expected to raise the cash rate tomorrow, however, there is growing speculation the central bank will lift rates this year.

Westpac economists are predicting the first hike will occur in August, with a 0.15 per cent increase, followed by a 0.25 per cent hike two months later. This would see the cash rate rise to 0.50 per cent by October.

While Governor Lowe has previously said the central bank is “prepared to be patient” to give wages time to rise, soaring inflation and falling unemployment figures could force the RBA’s hand sooner than planned.

Even if the RBA keeps the cash rate at a record low of 0.10 per cent for the remainder of the year, banks are likely to keep hiking fixed rates on the back of rising funding costs.

RateCity.com.au data shows the average of the big four banks’ lowest fixed rates have risen, in some cases, by 1 per cent or more over the last year.

Average big four bank lowest home loan rates, 1 year ago vs today

Source: RateCity.com.au. Note: rates are for owner-occupiers paying principal and interest. Some LVR requirements apply. Westpac’s variable rate in Feb 2021 was an introductory rate for 2 yrs.

While variable rates have generally been steady or dropping, some banks could hike variable rates later this year, ahead of the RBA, if their profit margins start getting squeezed.

What impact will rising rates have on how much people can borrow?

Rising interest rates will limit the maximum amount new borrowers can get from a bank.

For example, if the cash rate rises by 0.40 per cent by October, a person earning $100,000 who applies for a loan at this time might find they can borrow $31,900 less than they would today.

This estimate is based on a single person taking out a 30-year loan on the average new customer variable rate with no other debts. This is an estimate as borrowing capacity depends on people’s personal circumstances and varies between lenders.

Potential impact on a single person taking out a variable home loan

(based on the Westpac forecasted cash rate of 0.50% by October)

Source: RateCity.com.au. Notes: Calculations are based on CBA’s serviceability calculator for a borrower taking out a 30-year owner-occupier loan paying principal and interest on the RBA new customer rate of 2.59%, rising to 2.99% by October 2022. Minimum household expenditure is applied. Assumes APRA serviceability buffer stays at 3%.

RateCity.com.au research director, Sally Tindall, said: “With inflation rising both at home and overseas, pressure is building on the RBA to hike the cash rate.”

“The RBA wants to see stronger wages growth before it asks mortgage holders to pay more. However, higher than expected inflation figures, falling unemployment and a push from other central banks to hike rates could force its hand earlier than expected,” she said.

“Even if the RBA holds out until 2023, there’s a strong chance lenders will hike variable rates regardless, particularly if funding costs continue to escalate.

“A series of cash rate hikes, whenever they come, are likely to put a handbrake on our property market.

“Anyone borrowing at capacity will see their budget shrink, which could be enough to cool things down, particularly in property hotspots such as Sydney and Melbourne.

“While the majority of rates are no longer at record lows, there are still 31 fixed and 72 variable rates under 2 per cent.

“Refinancing to a lower rate now could soften the blow when the RBA does start hiking,” she said.

Lowest big four bank owner-occupier home loan rates

Source: RateCity.com.au. Note: Some loan-to-value ratio requirements apply.

Lowest owner-occupier rates on RateCity.com.au

Source: RateCity.com.au. Note Rates are for owner-occupiers paying principal and interest, LVR requirements apply for some loans.

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