Mortgage stress hits home: will the RBA hike the cash rate in August 2022?

With inflation still rip-roaring through the economy, mortgage holders paying variable interest will be nervously watching the Reserve Bank of Australia (RBA) for future rate hikes. 

Previous movements have already shifted the market dramatically, with successive 50 basis point stomps crushing wallets and property prices. Now, the average variable interest rate for owner-occupied P&I home loans, as tracked by Mozo’s database, rests at 4.11% – up from 3.03% in April. 

So let’s unpack the forecasts ahead of next week’s August RBA meeting. Will they hike rates again? If so, by how much? And what will an August rate hike mean for homeowners?

If we shake the magic 8-ball, all signs point to yes. As Australia’s official guardian of monetary policy, the RBA is expected to play a critical role in slowing inflation. With the annual CPI spiking to 6.1% in the June quarter, the RBA may feel they have little option but to pull the only handbrake they have: the official cash rate.

“The RBA is in a situation where they’re being expected to act, so they’re acting the only way they know how,” explains Mozo’s banking expert Peter Marshall. “But the only tools that they have are inappropriate.”

Lifting the cash rate is primarily designed to cope with a demand-driven inflationary environment. “Inflation drives prices, feeding into wages, which drives prices,” explains Marshall. “That’s what the Reserve Bank can address with the cash rate.”

But the problem? Today’s inflation isn’t demand-driven: it’s supply driven. Between pandemic labour shortages, environmental disasters, and Russia’s invasion of Ukraine, the price of non-discretionary goods like food and fuel has skyrocketed. But the RBA can’t fix those structural issues plaguing the economy – only governmental intervention can. 

“We’re using the medicine we’ve usually got to deal with the situation,” says Marshall, “but it’s the wrong medicine at the wrong time.”

Until the right medicine becomes available, both lenders and borrowers alike will have to cope with decisions from the RBA – and an August rate hike looks extremely likely.

Economists at Westpac and ANZ agree the RBA will hike the cash rate by at least 50 bp in August, following their double-whammy 50-point movements in June and July. More hawkish forecasts skew as high as 75 bp, but Marshall reckons the RBA won’t go that far.

“There have been a lot of people trying to make their voices heard about the potential downsides of so many large rate hikes,” Marshall explains, “so I’m hoping the RBA will take that into account.”

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Another 50 bp move would bring the official cash rate up to 1.85%, considered ‘neutral’ territory for Australian monetary policy (though it will rank well above pre-pandemic levels). If lenders continue following suit, variable interest home loans will also lift another half percentage point within the month.

If matters were perfect, Marshall would prefer a more dovish approach. “Do some 0.25% increases and signal to people that the low rate era is ending,” he explains.

“But putting up huge flashing neon signs saying, ‘Your mortgage repayments are about to double!’ isn’t helping.”

Those flashing signs have already panicked many consumers feeling the cost of living squeeze. “There’s lots of evidence that people are stopping spending, so the brakes are already on,” Marshall continues. 

“Why we would go for another 50 basis point increase in August – which is what seems very likely – seems puzzling.”

Unfortunately, it would take a recession for the RBA to ease up on the cash rate. Borrowers hoping for rate cuts may be disappointed for now – but if the RBA isn’t careful, they could get their wish.

“Inflation is being caused by particular events, changes in structures, and those things will unwind at some point,” says Marshall. “But we could be rushing towards a sharp recession, which would be the trigger the Reserve Bank needs to start cutting rates again and pull us back.”

The RBA maintains the economy has proven surprisingly stable and resilient, explaining in a speech last week that a slim majority of Australian households are well positioned to handle hikes. But the housing market has already begun showing symptoms of stress, with Corelogic reporting a worryingly fast 1.9% dip in nationwide housing values over the past four weeks alone.

“I think what will happen is in the next 12 months we’ll have a recession, things will get messy for a while, the RBA will slash rates, and it’ll start to stabilise,” surmises Marshall. 

So while we can bank on a steady flow of rate hikes for now, there is room for the RBA to overdo it and backpedal down the track. In the meantime, falling property prices may present a window of opportunity for first home buyers hoping to break in.

At the time of writing, 79% of lenders tracked in Mozo’s database passed along the full 50 bp July rate hike to customers. This percentage sits roughly on par with the June (86%) and May (81%) decisions, meaning most lenders have been quite keen to pass along costs to variable home loan customers. 

If the RBA moves the cash rate again in August, borrowers can bet on another round of rate rises from the Big Four (CommBank, Westpac, ANZ, and NAB) and other major challengers. 

Alarmingly, however, 9% of lenders passed along a greater than 50 bp hike last month, up from 3% and 0% in June and May respectively. Only 3% have yet to announce any rate changes. Smaller mutual banks and regional credit unions tended to hold off or hold back from the full hike, but with more and more brazenly outpacing the RBA’s precedent, some borrowers could find themselves in for a nasty shock in August.

Luckily, there may be some easement to fixed rate home loans, which have been escalating rapidly in recent months in anticipation of RBA movements. 

“I don’t think fixed rates will go much higher,” says Marshall. “Fixed rates have largely got future rate expectations priced into them now. So I think they’re going to settle in the area about which they are now, which is the 5% - 8% range – depending on the term.”

Only a trickle of fixed rate changes has been coming through in recent weeks, though there’s still room for growth. Those hoping to guard themselves from future rate hikes by refinancing will have a tough job comparing hefty fixed options to the rising variable tide.

According to Westpac, roughly sixty percent of mortgages use variable interest rates, making the Australian housing market remarkably sensitive to RBA decisions. But with many pandemic-era fixed rate terms ending soon, that proportion is set to get a whole lot higher.

“Sure, there are some people who have flexibility in their finances,” says Marshall, “but there will be a lot of people who bought a house in the last couple of years when property prices were at their peak and they borrowed as much as they possibly can, and they don’t have that kind of wiggle room.” 

“The RBA said rates wouldn’t be rising until 2024, so people went into those mortgages thinking they’ve got two or three years to get some of their loan paid while rates were really low. But that’s been taken away from them.”

As such, borrowers may find themselves scrambling to prepare. What options do they have?

“Investing some time in reducing your mortgage repayments is one of the best things you can do,” Marshall recommends. Three key features to make use of?

• Offset account
  
• Free extra repayments
  
• Redraw facility
  

An offset account, while more common with variable interest rate mortgages, has the potential to save borrowers lots of interest, since the account balance negates a portion of their mortgage principal for which they’re liable to pay interest. 

For borrowers without an offset account, making additional repayments is another good method of reducing payable interest long-term, with a redraw facility enabling them to dip back into those funds when they need them.

But if your loan doesn’t already have these features and you’re in a good position to refinance, it may be time to consider other options.

“Shop around, switch lenders, and be prepared to put in some legwork,” says Marshall. “Housing’s become treated as an investment option rather than a necessity. And unless that’s addressed and we have some real reform, we’re in for more of the same.”

Stay on top of rate movements with Mozo’s new interest rate tracker. You can also see how rate changes affect your mortgage repayments with our rate change calculator.