- The RBA hiked interest rates by 50 basis points on Tuesday.
- The latest interest rate increase is the biggest in over two decades.
- The rate increase has sharply raised mortgage holders’ monthly repayments.
The surprise decision by the Reserve Bank of Australia (RBA) to hike interest rates by 50 basis points, taking the cash rate target to 0.85%, has inflicted further pain on mortgage holders. The latest interest rate increase is the biggest in over two decades and the first back-to-back rate hike since May 2010.
In May this year, the Australian central bank had raised the official cash rate by 25 basis points to 0.35% from 0.1%.
Tuesday’s hike, which was higher than what most economists expected, has sharply raised mortgage holders’ monthly repayments. It comes at a time when the cost-of-living has increased steeply, and wage growth remains sluggish.
A back-of-the-envelope calculation suggests that the rate hike would add over AU$130 per month on a loan of AU$500,000 over 25 years, and more than AU$260 a month on a loan of AU$1 million for an average borrower, if fully passed on by the banks.
Meanwhile, Westpac on Wednesday became the first among the ‘Big 4’ banks to announce it would pass on the rate hike to consumers. The other three -- Commonwealth Bank, NAB and ANZ -- also followed suit. The variable interest home loans will now rise by 0.5% across all four lenders.
However, the RBA is likely not going to stop at this. Economists have already warned borrowers to expect further interest rate hikes in July and August 2022. Talking about a variable rate borrower, the RBA’s analysis shows that nearly 25% of such borrowers are expected to witness a 30% or more rise in mortgage payments from a 2% rise in rates.
RBA Governor Philip Lowe had earlier said that the rise was in response to the fact that "inflation in Australia has increased significantly".
What can mortgage holders do in such a scenario?
Even as many borrowers are on track with their monthly payments, there are others who could receive sharp pain at the hands of this surprise rate hike. So, here are some actions that the Australian mortgage holders can take immediately to lessen the pain:
Compare market rates
Experts advise to compare the interest rates on your loan with other lenders in the market. Always focus on lenders which offer competitive rates.
Interest rates always vary among lenders, and there is a difference between the lowest variable rate and the highest variable rate. You can also check loan rate comparison websites to find a better deal.
Despite rate hikes, there would be lenders willing to keep their business rolling by offering sharper discounts to refinancers seeking to switch lenders.
Tenure extension with same lender
There may be cases where borrowers are finding it difficult to pay increased repayments. The situation may become more challenging after more rate hikes in future. In such a situation, it would be wise to request your lender, if feasible, to increase the tenure of the loan and reduce your monthly repayments.
Last but not least is to review your income, expenses, debt, savings, and investments. You should carefully find out a way to reduce your expenses.
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