Reprieve for borrowers not too far away
Yesterday, the Reserve Bank (RBA) increased rates yet again, but at a much slower or normal pace, lifting the official cash rate to 2.6 percent. While this increase indicates that the central bank is still concerned with inflation it does also suggest that a reprieve for borrowers is not far away.
Rate increases slowing
Yes, this RBA decision evidences a slowdown in the pace of these hikes, from 50 basis points as we’ve had to endure since May this year, to 25 basis points and we’ve most likely only got a handful more to come, some leading economists suggest.
RBA Governor Dr Philip Lowe emphasised in his October 2022 Monetary Policy statement that it was time to slow down, for the board to sit back and see how these impacts unfold.
“The cash rate has been increased substantially in a short period of time. Reflecting this, the Board decided to increase the cash rate by 25 basis points this month as it assesses the outlook for inflation and economic growth in Australia.”
Australia’s response to interest rate tightening is much better when compared to others around the world, as explained in our July blog - Inflation and rate increases to end next year. Here in Australia, the RBA meets every 4 weeks, or on the first Tuesday of every month. In the US, they meet every 6-7 weeks so in comparison, there are more opportunities for the RBA to make changes. We don’t have 10, 20 or 30-year fixed rates in Australia like what they have in the UK, or in the US. This means it's harder for these foreign countries to make as much of an impact on inflation as the increases in interest rates will only slow things down for those applying for new loans or those on variable splits.
Bonds lower
A great predictor of inflation and the general direction of the economy is the bond market and following yesterday’s decision triggered the biggest intraday drop in three-year government bond yields since October 2008. This shows that markets are now saying that in 3 years, the cash rate is likely to be a little less than 3.25 per cent now, not 3.75 per cent.
Source: MarketWatch
Repayments
In terms of impacts to repayments, on variable, principal and interest (P&I) monthly repayments for your home loan (owner occupied), this recent increase of .25 of a per cent will equate to:
- extra $74, on $500,000, or $683 extra per month, since rate rises in May 2022
- extra $110, on $750,000, or $1,023 extra per month, since rate rises in May 2022
- extra $147, on $1,000,000, or $1,365 extra per month, since rate rises in May 2022
Note: Adopted a rate increase of .25 per cent, taking 4.19 to 4.44 per cent, making P&I repayments over a 30-year term. Then, we compared these new rates, to what the competitive variable rates in May 2022 were, being 1.94 per cent.
The banks that have passed it on so far are…
As of midnight last night 04 Oct 2022, Westpac, ANZ, CBA and NAB had all increased their rates by .25 of a percent, matching the RBA’s decision, with their effective dates in roughly a few weeks.
What’s in store for November or December
While again, we don’t expect any more 50 basis point increases, as RBA Governor Lowe emphasised, “the size and timing of future interest rate increases will continue to be determined by the incoming data and the board's assessment of the outlook for inflation”. So it will be that they just sit back and observe the landscape for now.
The global economy is slowing and here in Australia, it’s expected to do the same. And while unemployment rate according to the Australian Bureau of Statistics was 3.5 per cent in August, around the lowest in almost 50 years, some increase in this rate is expected and this will apply less pressure to the RBA as the economy slows.
CBA’s economists who were the minority in guessing what would happen to rates this month, have come out and said that they expect things to slow and for the RBA to increase rates by 25 basis points in November and December.
Final thoughts
We did agree with CBA’s earlier prediction, in last month's blog - The End Of 50 Basis Point Increases, that rates would only go up by 25 basis points yesterday. We also believe that rates will increase in November but then we will have no further increases until February. So we should all be able to breathe a sigh of relief for a little while. And even though these decisions are data dependent, we at Black & White Finance believe this hard and fast round of increases have done enough to curb inflation and the data will soon reveal this in the coming months. The RBA has recently acknowledged that "the full effects of higher interest rates are yet to be felt in mortgage payments". As seen above with the bank's deferred effective dates following these rate decisions, it’s a few weeks before rate rises actually are implemented by banks and then it’s in the following month’s repayment when the household cash flow feels the higher monthly mortgage repayments.
As these rates rise, it's important to ensure your lending solution is in your best interests to tackle this challenging period and that each loan application is with the lender who’s rules meet your specific requirements. We've worked very hard to create long-lasting, fostered relationships with all the 30 plus lenders on our panel, to ensure all our borrowers here at Black & White Finance are on the best terms available. Our finance strategies now more so than ever, need to be smart and in our best interests, to tackle this inflationary economic landscape.
If you want to know more about the different rates, terms, or bank specials on offer at the moment or just have a general question, please send a note to peter@blackandwhitefinance.com.au or click the start today button a little lower. With the help of our amazing Mortgage Broker Sydney – Black and White Finance team, we will be able to support you.
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