The Reserve Bank has lifted interest rates for the fifth month in a row, increasing the cash rate by 0.5 percentage points to 2.35 per cent, a seven-year high. The Reserve Bank is looking to bring down inflationary pressures as fast as it possibly can. However, this is a difficult and challenging news for most home buyers.
What does this mean? Well. For Australians with a typical $500,000, it’s about an extra $145 a month in addition to the extra $475 they’ve had to find since rates started raising before the election in May.
Because the board raised the cash rate by another 50 basis points, according to analysis by RateCity, the latest increase will add a further $216 a month to a $750,000 mortgage.The total increase in monthly repayments on a $750,000 mortgage balance will be $922 since the RBA started lifting the cash rate from its record low of 0.1 per cent in May.
Would it ever stop? With Russia’s invasion of Ukraine and reduction in gas supplies to Europe, as well as China’s ongoing COVID-19 lockdowns, Mr Lowe acknowledged it was hard to know how far rates would have to rise to contain inflation without tanking the economy. The board expects to increase interest rates further over the months ahead, but it is not on a pre-set path.
According to BetaShares, as at July 2022, the nationwide MRR has reached 39%, compared to an average since 2004 of 32.7% – and a peak level of 42% in June 2008. Our estimates suggest that if the RBA raised the official cash rate a further 1.65% – to the 3.5% expected by the market in mid-2023 – the nation-wide MRR would reach 46.3%, or well beyond its mid-2008 level (assuming the variable mortgage rate also rose a further 1.65% to 6.35%). In fact, an RBA cash rate of 3.5% implies nationwide MRR would reach its highest levels since mortgage rates touched 16% in June 1990 (a time when the MRR hit 47.1% of income).
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Reference.
Reserve Bank of Australia. “Cash Rate Target.” Reserve Bank of Australia, 2022, www.rba.gov.au/statistics/cash-rate/.
Bassanese, David. “Breaking Point: Housing Affordability Update.” BetaShares, 24 Aug. 2022, www.betashares.com.au/insights/housing-affordability-update/?mkt_tok=NDQyLVdISi0yMDQAAAGGsB_cqbTMTnF411IEIy33fbUdRCAHNpfQz9eYymKQKmbKxXRHakISQTfyzR9Jq7l0tyDoDPahI_dJ5kzfHrbdrPco5zBcG2bTEUOmywq4TJC9. Accessed 6 Sept. 2022.
“Live: RBA Increases Cash Rate for Fifth Month in a Row, Reaching Seven-Year High.” ABC News, 6 Sept. 2022, www.abc.net.au/news/2022-09-06/reserve-bank-australia-cash-rate-interest-rates-live-blog/101408616. Accessed 6 Sept. 2022.
“Reserve Bank Raises Interest Rates Again in Most Aggressive Increases since 1994 – ABC News.” Amp.abc.net.au, amp.abc.net.au/article/101410504. Accessed 6 Sept. 2022.