How inflation could impact your home loan

Colourful balloons on the ground and floating inside a front door, signifying inflation and mortgage prices.
Photo by NeONBRAND on Unsplash

The September quarter figures for the Consumer Price Index (CPI) have been announced this week, with more increases to common household costs.

CPI rose by 0.8% as it did in the previous quarter, bringing annual CPI inflation to 3%, with  the government’s free childcare program of 2020 continuing to have an effect on the annual figure as it unwinds.

If you’re looking at these numbers and trying to figure out exactly what it means for your finances or home loan, read on.

What is the Consumer Price Index?

CPI reflects the changing price of goods and services over time. It’s tracked and reported on quarterly by the Australian Bureau of Statistics (ABS), who’ve been doing so in some form since federation in 1901. 

It considers a set basket of common items or activities Australians spend on, such as food, housing, clothing, home furnishing, transport, education, insurance and recreation. These categories are monitored for price changes individually, which contribute to overall CPI. For example, fuel (up 7.1%) and new home purchases (up 3.3%) were the most notable price hikes this quarter.

It’s important to note that housing has the largest weighting in this calculation, but it only considers new builds. That means Australia’s soaring land prices don’t factor into the equation, so CPI isn’t an exact cost of living measure – the ABS has other indexes for this broader figure. 

Why is the September quarter CPI important?

Like all things in recent years, the pandemic has impacted CPI. 

Global supply chain disruptions have resulted in increased shipping costs, with those price hikes passed down the chain to consumers buying internationally sourced items like furniture, vehicles and tech equipment. The same goes for companies purchasing building materials or equipment, with the cost again impacting consumers, who in this case are new home buyers. The significant rise in fuel prices can also be attributed to rising demand as economies reopen and people begin travelling again.

We’ve seen these trends escalating in recent months, and other economies like New Zealand – which just recorded its fastest quarterly inflation rate in more than a decade – are feeling the cost. So conversations around the future of inflation in Australia are running hot.

But as always, the relevance of CPI is tied to wage growth: you effectively want wages to grow at the same rate or slightly higher than household costs. Unfortunately, we aren’t quite succeeding in that balancing act.

The Reserve Bank of Australia’s (RBA) target is to keep inflation steady between 2-3% (which hasn’t always been achieved). But the latest wage growth indicators sit considerably lower than the current CPI, rising by 1.7% over the last year to June. This effectively leaves consumers out of pocket.

However, there’s also been a significant recovery in job advertisements, with 36% more opportunities advertised last month compared to pre-pandemic levels, according to the National Skills Commission. This demand for talent could put jobseekers in a better position to negotiate higher salaries, which may in turn bump-up wage growth.  

Could inflation impact your mortgage?

The inflation rate has the potential to impact home loan interest rates, as the cash rate set by the RBA can be influenced by the need to manage inflation levels. The rate the RBA sets then works as a benchmark which lenders set their own mortgage prices against.

If the RBA wants to stimulate the economy it will lower the cash rate (as we’ve seen over the last two years) to bring down mortgage rates and make financing a property purchase more accessible. However, as we’ve also seen, this can result in rising property prices.

Movement in either direction can impact your ability to take out a home loan, as well as the ongoing costs of paying down that loan. When you apply for a home loan, banks stress test your ability to meet loan repayments (aka your home loan serviceability) at a higher rate. This is to ensure you can still meet repayments if interest rates or other costs rise.

Recently, the Australian Prudential Regulation Authority (APRA) introduced tougher minimum requirements for these tests in an effort to curb the soaring cost of property in Australia. This means it could be harder for some borrowers to get a mortgage.

Australia's high debt-to-income ratios have only increased as homeownership has become more feasible due to low interest rates. This means even a seemingly small shift in mortgage interest rates can have a significant impact on household finances, as the figure homeowners are paying that interest on is so high. And if you can’t wrangle a pay rise, this could mean dipping into savings or cutting costs elsewhere to cover the difference.

However, many pundits remain skeptical about the RBA raising the cash rate any time soon, pointing to the low likelihood of wage growth outstripping CPI in the next few years, which is a key measure used when considering rate rises.

Whether or not rates are set to rise, you want to make sure you’re getting a good deal on a home loan that meets your needs right now. Check out fees and features below from a few different lenders.

Compare home loans - last updated 17 April 2024

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* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.

** Initial monthly repayment figures are estimates only, based on the advertised rate. You can change the loan amount and term in the input boxes at the top of this table. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.

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