The consecutive RBA cash rate hikes have certainly put a damper on real estate sales activity. According to the Housing Industry Association (HIA), sales in the three months to February were 46.85% lower compared to the same time last year. In Queensland alone, the RBA rate rise has caused a 51.2% dip in sales.
This, despite wages climbing 3.3% which is the fastest growth spurt in a decade. The steep home loan rate increase is eroding consumer confidence; this has been a tremendous upward movement of Reserve Bank interest rates Australia has not seen since 2012.
Are you aware of how the increases in the RBA cash rate actually affect your home loan and your very property? In this blog we thoroughly tackle the four major ways that this negatively impacts you as a homeowner.
ASK PHILWhat is the cash rate?
The RBA cash rate is the target interest rate that the Reserve Bank of Australia sets for overnight loans in the money market. This rate is determined by the RBA’s monetary policy, which aims to achieve its objectives of price stability, full employment, and the economic prosperity of the country
The RBA board meets on the first Tuesday of each month (except January) to review the cash rate and decide whether to leave it unchanged, increase it, or decrease it. The RBA interest rate announcement is closely watched by financial markets and the public.
This is because changes in the cash rate can have a significant impact on the economy and individual households, and especially on mortgage holders on variable rate home loans.
Current cash rate Australia
On March 2023, the board decided to increase the RBA cash rate by 25 basis points, so the current RBA cash rate sits at 3.6%. The RBA cited the continued efforts to combat inflation as the main factor supporting its decision to maintain the current monetary policy stance.
4 Ways the RBA cash rate hikes affect your home loan
1. Increase in your monthly repayments
The most obvious implication of RBA cash rate hikes is causing mortgage monthly repayments to SOAR. As a matter of fact, a $500,000 mortgage now requires $11,800 MORE in annual repayments!
When the RBA increases the cash rate Australia, banks and other lenders typically pass on the higher interest costs to borrowers by raising their variable interest rates. This means that borrowers with variable rate mortgages will see an increase in their monthly repayments, as they will now be paying a higher interest rate on their outstanding loan balance.
Borrowers who had previously been on fixed rates are now facing higher variable rate repayments, as their fixed rate term has expired and the variable rate has increased.
As a result, these borrowers are now spending 30% of their income on mortgage repayments, which could put them at risk of financial difficulties — as opposed to 5%-20% of their income from just a few years back.
There will be 800,000 homeowners with fixed rate mortgages who are going to have it rough when they switch to revert rates once their term ends. Those who did not save during the period of low fixed borrowing costs and spent more money are especially vulnerable.
2. Interest rates on existing mortgages becoming less competitive than new rates on the market
For fixed rate mortgage holders that locked in 2% rates, the transition to today’s rates that range from 5% to 6% will be quite a whiplash.
However, those with variable rates are left to brace themselves for impact after every RBA interest rate announcement, hoping for the cash rate to remain the same or go lower.
When the Australian Reserve Bank interest rates climb up, interest rates on existing mortgages may become less competitive compared to new rates on the market. This is because existing borrowers are locked into their current loan arrangements, and they may not be able to take advantage of lower interest rates that are now available to new borrowers.
In other words, when interest rates on new mortgages become more competitive than the rates on existing mortgages, it means that new borrowers may be able to secure loans at lower rates than what existing borrowers are paying. This could lead to existing borrowers refinancing their loans with another lender or renegotiating their rates with their current lender to get a better deal.
In fact, that is precisely what is happening right now. Around 2370 homeowners are refinancing home loans every business day!
3. Your loan-to-value ratio increases
Unfortunately, not all homeowners have the option to refinance. One factor that hinders them from switching home loans is their increased loan-to-value ratio as a result of the RBA cash rate increase.
The loan-to-value (LTV) ratio is the ratio of the amount borrowed to the value of the property used as collateral for the loan. When the Australian RBA interest rates increase, it affects the interest rates that lenders charge on loans, including home loans.
When interest rates increase, it means that the cost of borrowing increases, and this can affect the LTV ratio in a few different ways:
- If a borrower has a variable interest rate loan, a cash rate hike may lead to an increase in the interest rate they are charged. This means that the monthly repayments on the loan will also increase, which impacts the borrower’s ability to make repayments. If the borrower is unable to make the higher repayments, it may lead to the lender requiring the borrower to provide additional security or collateral to maintain the same LTV ratio.
- An increase in interest rates may also cause property values to decrease. If property values decrease, the value of the collateral (usually a home with equity) used to secure the loan may decrease as well. This can result in a higher LTV ratio, as the amount borrowed remains the same, but the value of the collateral has decreased.
4. Your home value and equity decrease
As mentioned in the third item, an increase in interest rates may also cause property values to decrease. To be clear, it does not directly cause a decrease in property values or equity. However, it can indirectly impact property values and equity through its effect on the broader economy and the housing market.
When the RBA raises the cash rate, it can increase borrowing costs, making it more expensive for borrowers to take out loans, including mortgages. This can reduce the demand for property, particularly among first-time buyers who may be deterred by higher borrowing costs. If demand for property decreases, this can put downward pressure on property prices, which can lead to a decrease in property values.
A decrease in property values can also result in a decrease in equity. Equity is the difference between the value of the property and the amount owed on any mortgages or loans secured against the property. If property values decrease, the amount of equity a homeowner has in their property will also decrease, as the value of the property is lower than before.
To add, an increase in the cash rate can also impact the broader economy, which can also affect property values and equity. If the cash rate increases, it can decrease consumer spending and economic growth, which can negatively impact the housing market. This also leads to a decrease in property values and equity.
Case in point: A recent RateCity analysis showed that a Sydney first home buyer who purchased a $1.3m house in July 2021 with a 20% deposit will only have 17% in equity today after the median price fell to $1.2m!
Know your next move with Professional Lending Solutions
For refinancing homeowners and first home buyers Gold Coast who are unsure what the next step to take is during this tight cycle, don’t hesitate to ask help from a finance broker Gold Coast such as myself.
My team and I will answer your questions and make every effort to work with you and your financial situation. Click the button below to book a call with me today.
BOOK AN APPOINTMENT WITH PHIL
Phil’s journey from banking to mortgage brokering reflects a career driven by a commitment to personalised service and tailored financial solutions. With a distinguished background in banking, including roles at NAB, ANZ and Lloyds TSB Bank in the UK, Phil spent 12 years developing expertise in personal and commercial finance, while also completing a Bachelor of Business (Finance), followed by an MBA majoring in International Business.