What another 50bps hike in interest rate means for mortgage holders?

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Highlights

  • The RBA raised interest rates to 0.85% in June after its first hike in May.
  • The latest interest rate hike is expected to hurt mortgage owners, with people from Western Australia facing the toughest conditions of all.
  • Big four banks are expected to pass on the latest interest rate hike in full.

The Reserve Bank of Australia (RBA) has managed to stun Aussies once again with an interest rate hike of 50 basis points in June. The decision came a month after the RBA raised interest rates for the first time in over a decade. However, the news has been nothing less than a shock for mortgage holders who are looking at heftier repayments as rate hikes accumulate over months.

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The RBA is most likely to continue its practice of rate hikes in the coming months to bring back normal monetary conditions to the economy. During the pandemic, the central bank lowered the cash rate to near-zero levels, adding extra stimulus to the economy. The central bank is now withdrawing this stimulus to ease inflationary pressures prevailing across the country.

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In response to the massive cash rate hike, commercial banks have also begun their rate hike cycle. Although most households have accumulated high savings during the lockdown period, these savings could deplete in the coming months as households use them to manage their expenses.

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How are the big four banks responding?

Westpac Banking Corporation (ASX:WBC) has decided to pass on the latest interest rate hike in full to new and existing customers. The bank will be raising its home loan variable interest rates by 50 basis points or 0.50% per annum from 21 June 2022. The bank is also introducing a term deposit rate of 2.25% per annum for 12 months to support customers with their savings.

While Westpac is the first bank to respond to the cash rate hike, other banks are yet to clarify their stance on the same. It is important to note that RBA’s June hike exceeded the expectations of all the big four banks.

The Commonwealth Bank of Australia (ASX: CBA) and the National Australia Bank (ASX: NAB) had expected a rate hike of 0.25%, The Australia and New Zealand Banking Group Limited (ASX: ANZ) and Westpac had anticipated the rate hike to be as high as 0.40%.

Speculations are rife that the remaining big banks will also pass on the rate hike in full magnitude to their variable rate customers. Deposit rates are also expected to increase, and fixed rates have already moved up, in line with rising bond yields.

The RBA’s decision to raise rates by a much higher margin than expected signifies that the central bank wants to reduce the growth momentum in the economy. The sudden rise in interest rates could hurt consumer spending and reduce lending in the coming months.

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By how much will mortgage repayments rise?

Among the borrowing population, the entrants to the mortgage market are likely to be most discouraged, with the cash rate rising to 0.85%. However, rising rates are the harsh reality of the post-pandemic era and must be accepted.

The next few months would be marked by rapid rises in the interest rates, though the magnitude of the hike may vary. Economists at CBA and NAB suggest that the recent change of the government, weakening property market, and steady wages could bring lower hikes in the coming months. However, the RBA has a history of shocking the financial market, which could become a recurring characteristic of the bank’s upcoming decisions.

Experts believe that the effect of the rate hike will be most pronounced throughout Western Australia (WA). This is because Western Australia has the highest inflation rate in the country at 7.6%. Meanwhile, wage growth has also been painfully low in WA at 2.2%, the lowest among all states. Thus, mortgage holders in WA could face the deepest impact of the rate hike.



 


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