Home loan costs skyrocketing: will the RBA hike the cash rate in July?

The Reserve Bank of Australia (RBA) has responded swiftly to soaring economic inflation, hiking the official cash rate 0.75% in the last two months alone. The movements brought interest rates back up to pre-pandemic levels and spelled much anxiety for home loan borrowers, many of whom were already feeling the squeeze from the rising cost of living. 

With the RBA’s July meeting looming next week, let’s investigate the likelihood of another rate rise and how banks will continue to react in the era of high interest.

Inflation continues to dog the Australian economy, with last quarter’s 5.1% spike in the Consumer Price Index rather forcing the RBA’s hand when it comes to raising the official cash rate. But since the Australian economy is also rather large and cumbersome, it’ll take awhile before things slow down. As such, economists almost universally agree we’ll see another rate hike in July – and it won’t be the last this year, either.

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Further rate hikes will continue to have knock-on effects on home loans and savings accounts, whose interest rates have already ballooned in the wake of the May/June decisions.

Historically, the RBA takes a cautious approach whenever lifting the cash rate, typically only moving 25 basis points at a time. This “by the book” manoeuvre was what we saw in May as they began the process of normalising monetary conditions. However, June’s shock 50 bp rise eclipsed even the most hawkish predictions, so many economists will be bracing for a similarly aggressive jump in July.

“We’re in a situation where inflation has risen a lot more sharply than the RBA and others have forecast, and the cash rate is still very close to historic lows,” explains Nomura Australia senior economist Andrew Ticehurst. 

“The RBA has plenty of work to return the policy towards more normal levels, and I think you could make the case for bigger moves at the start of the cycle when you know you are a long way from where you need to be.”

RELATED: How to manage higher mortgage repayments

Where we ‘need to be’ is a terminal cash rate between 2% - 3% by 2023, as this range is estimated to have the biggest slowdown effect on inflation. To meet that target, Westpac predicts the RBA will hike the cash rate by 50 bp in both July and August before ending its tightening cycle at 2.6% in 2023, a view shared by Bank of America and Goldman Sachs. 

“Inflation is projected to be above the target band over the forecast horizon with unemployment being below its sustainable level,” commented the chief economist at the Centre of Independent Studies Peter Tulip, who used to work for the RBA. “They are the two things the central banks should be reacting to.”

Such a move from the RBA would put the official cash rate at 1.35% in July – 125 bp higher than it was just in April.

It’s extremely unlikely – but not impossible – that the RBA would forego hiking the cash rate in July. After all, wages haven’t remotely kept pace with inflation, and any salary increases we’ve seen can mostly be attributed to reduced working hours in the wake of COVID-19 and extensive east coast flooding. If the RBA believes hiking the cash rate will stress family budgets way too much, they may leave things be. 

As for a rate cut, the RBA would only cut the rate if the economy were headed into a recession, which is a mild risk later this year.

While banks pounced on the May rate hike quite eagerly, they were a little slower on the uptake for June. The Big Four (CommBank, ANZ, NAB, and Westpac) passed along the full 0.50% June rate hike within a few days of the RBA announcement, while other competitors followed suit over the next two weeks. 

At the time of writing, here’s how the 96 lenders tracked in Mozo’s database responded to the 0.50% June RBA hike.

• 77% passed on the full rise to their home loan customers.
  
• 6% passed on a partial or no hike. 
  
• 15% have yet to make an announcement.
  
• 1% passed on a rate hike higher than 0.50%.
  

The changes have shifted many home loans on the market back to pre-pandemic levels. Now, the average variable rate for owner-occupiers making principal and interest repayments sits at 3.61% p.a., up from 3.02% in April.

Customers hoping to avoid further variable rate hikes by fixing their home loans are out of luck, however, since many lenders have lifted fixed interest rates well beyond pre-pandemic levels. In fact, fixed rates haven’t been this high since 2015.

If the RBA moves the cash rate again in July, we can likely expect lenders, especially bigger banks, to pass along the costs in due course. By comparing what’s out there, customers hoping to buy-in or refinance will get a clearer idea of how different rates stack up, what’s competitive, and most importantly, what’s affordable.

If you’re feeling the mortgage stress, you’re definitely not alone. In a recent economic report, Westpac observed that Australian mortgages are remarkably sensitive to fluctuations in the cash rate because around 60% are on a floating (i.e. variable) rate. Borrowers may find themselves impacted in multiple ways by rate hikes, including via:

• Family budget stress.
  
• Limited borrowing capacities and harder serviceability tests. 
  
• Falling house prices and equity. 
  
• Depressed consumer confidence.
  

Up to 90% of mortgage borrowers are likely to be affected by one or more of these impacts over the next year and a half. 

If there’s a silver lining it’s that higher interest rates tend to push down property prices in the long run, so first home buyers may find themselves standing a better chance at auction – or even able to negotiate a price privately. However, for those feeling the squeeze, now’s an excellent time to take stock of your mortgage repayments and, if you don’t like what you find, look for other options.

Some strategies you can use to reduce mortgage stress include:

• Refinancing. Many lenders, especially online lenders, have been keeping their interest rates extremely competitive in the era of rate hikes. Some even offer cashback if you refinance with them, so it’s worth comparing your current deal with others out there – and save some serious money doing it. (Here are some red flags to look out for in your lender).
  
• Getting an offset account. An offset account is a bank account attached to your mortgage that ‘offsets’ (i.e. reduces) the amount of interest you repay. For example, if you have $200,000 left on your home loan and $50,000 in an offset account, you’ll only have to pay interest on $150,000. Just keep in mind that offset accounts are more common with variable rate mortgages – not so much with fixed rate options.
  
• Paying down as much of your principal as you can. Any amount of principal you pay off now will save you interest later, so if you’ve come into some extra cash (maybe a nice tax refund?), consider putting it toward your mortgage repayments. Just make sure your lender allows you to do this at no extra cost: bonus points if there’s a redraw facility in case you need the cash for an emergency later.

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.