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Highlights
- RBA Governor Philip Lowe stated that borrowers should remain ready for further hikes to bring inflation down to target numbers.
- The first increase in cash rate may not significantly impact borrowers.
- Borrowers should take help of some home loan calculators to help them analyse upcoming repayments of loans amidst rise in interest rates.
Australia has been facing the harsh grim of skyrocketing prices. Thus, to combat inflation, the Reserve Bank of Australia (RBA) recently increased the interest rate for the first time in about 12 years. This is not surprising, as most banks and economists predicted that RBA would increase the cash rate in the upcoming days.
On May 3, RBA raised the interest rate from 0.1% to 0.35%. Additionally, RBA Governor Philip Lowe has stated that borrowers should remain ready for further hikes in order to bring inflation down to the target numbers. Thus, the road for homebuyers will be steeper in the upcoming months as economists predict that rate can reach up to 2% in a year’s time.Banks are now passing the total value of RBA’s increase, and with that, the era of easy home loans comes to a near end. Commonwealth Bank of Australia (ASX:CBA) was the first bank in the country to implement the new rates, followed by other big banks such as Australia and New Zealand Banking Group (ASX:ANZ), National Australia Bank (ASX:NAB) and Westpac (ASX:WBC).
Source: © Michalsuszycki | Megapixl.com
Consequently, homeowners with mortgage are now calculating how the rate hike would impact their mortgage outgo.
The first increase in the cash rate may not significantly impact the borrowers. However, once further hikes come into the picture, the road may get steeper for borrowers. Taking an example, in the current scenario, the monthly instalment on an AU$600,000 home loan would increase to AU$2,324, an increase of $74.
Global property data and analytics-driven solutions provider CoreLogic research director, Tim Lawless, opines that under a 100-basis point lift in variable mortgage rates, a new borrower in Sydney would be facing a rise in monthly mortgage costs of AU$486. Under a 200-basis point rise, mortgage costs would be AU$1,005 higher than current levels.
Notably, while the financial health of borrowers affects the interest rate they will be offered on a loan, economic factors and government monetary policy affect the whole mortgage rate universe. To be specific, factors affecting mortgage rates include inflation, rate of economic growth, monetary policy, the bond market, and housing market conditions.
FINAL READ: Five ways to prepare for interest rate hikes
Conclusively, as policies follow a dynamic nature in the current environment, borrowers should take the help of some home loan calculators to analyse the upcoming repayments of the loans amidst the rise in interest rates.
