Rate hikes are coming, with or without the RBA
The RBA is not expected to hike interest rates tomorrow, but there is growing speculation that the central bank will hike interest rates this year.
Westpac economists predict the first hike will come in August with a 0.15 percent hike, followed by a 0.25 percent hike two months later. This would increase the key interest rate to 0.50 percent by October.
While Gov. Lowe has previously said the central bank is “willing to be patient” to give wages time to rise, rising inflation and falling unemployment numbers could force the RBA to act sooner than planned.
Even if the RBA keeps interest rates at a record low of 0.10 percent for the rest of the year, banks are likely to hike fixed rates further as funding costs rise.
Data from RateCity.com.au shows that the average of the four big banks’ lowest fixed rates has risen by 1 per cent or more in some cases over the past year.
Big Four banks average lowest mortgage rates a year ago compared to today
| fare type |
1 year ago |
today | difference |
| 1 year fixed |
2.12% |
2.47% |
0.35% |
| 2 years fixed |
2.08% |
2.64% |
0.56% |
| 3 years fixed |
2.08% |
3.08% |
1.00% |
| 4 years fixed |
2.06% |
3.35% |
1.29% |
| Fixed 5 years |
2.57% |
3.59% |
1.02% |
| lowest variable |
2.57% |
2.24% |
-0.33% |
Source: RateCity.com.au. Note: Prices are for owner occupiers paying principal and interest. Some LVR requirements apply. Westpac’s variable interest rate in February 2021 was an introductory interest rate for 2 years.
While floating rates have generally been flat or down, some banks could hike floating rates ahead of the RBA later this year if their profit margins start to shrink.
What impact will rising interest rates have on borrowing capacity?
Rising interest rates will cap the maximum amount new borrowers can get from a bank.
For example, if cash rates rose 0.40 percent through October, a person applying for a loan at that time and earning $100,000 might find they could borrow $31,900 less than today.
This estimate is based on a single person taking out a 30-year loan at the average variable interest rate to new customers with no other debt. This is an estimate as creditworthiness depends on people’s personal circumstances and varies between lenders.
Potential impact on an individual taking out an adjustable home loan
(based on Westpac’s forecast liquidity rate of 0.50% through October)
| sole income | Current lending capacity | New Maximum Loan Capacity (Oct. 22) | difference |
|
$100,000 |
$751,000 |
$719,100 |
-$31,900 |
|
$150,000 |
$1,085,700 |
$1,039,500 |
-$46,200 |
|
$200,000 |
$1,444,700 |
$1,383,300 |
-$61,400 |
Source: RateCity.com.au. Notes: Calculations based on CBA’s profitability calculator for a borrower taking out a 30-year owner-occupier loan and paying principal and interest at the RBA’s new customer rate of 2.59%, rising to 2.99% by October 2022. The minimum household expenses apply. Assuming APRA maintenance buffer stays at 3%.
RateCity.com.au Research Director Sally Tindall said: “With inflation rising both domestically and internationally, there is mounting pressure on the RBA to raise interest rates.”
“The RBA wants to see stronger wage growth before asking mortgageholders to pay more. However, higher-than-expected inflation numbers, falling unemployment and pressure from other central banks to raise interest rates could materialize sooner than expected,” she said.
“Even if the RBA holds out through 2023, there’s a strong chance that lenders will still hike floating rates, especially if funding costs continue to escalate.”
“A series of rate hikes, whenever they come, will likely slow our housing market.
“Anyone borrowing at full capacity will see their budget shrink, which could be enough to cool things down, especially in property hotspots like Sydney and Melbourne.
“While the majority of rates are no longer at record lows, there are still 31 fixed and 72 floating rates below 2 percent.
“Refinancing at a lower rate now could soften the blow if the RBA starts to hike,” she said.
Lowest home equity interest rates of the big four banks
| fare type | CBA | Westpac | SNAP | NO |
| 1 year fixed |
2.54% |
2.39% |
2.54% |
2.39% |
| 2 years fixed |
2.69% |
2.59% |
2.69% |
2.59% |
| 3 years fixed |
3.14% |
3.04% |
3.14% |
2.99% |
| 4 years fixed |
3.34% |
3.34% |
3.34% |
3.39% |
| 5 years fixed |
3.59% |
3.59% |
3.59% |
3.59% |
| variable |
2.29% |
2.19% |
2.29% |
2.19% |
Source: RateCity.com.au. Note: Some loan-to-value requirements apply.
Lowest rates for owner occupiers on RateCity.com.au
| fare type | lender | Advertised price |
| 1 year fixed | RACQ, UBank |
1.79% |
| 2 years fixed | Qudos Bank, Southern Cross, Geelong Bank, Unity Bank, Bank of Us. |
1.99% |
| 3 years fixed | Bank of Us, Southern Cross CU |
2.19% |
| 4 years fixed | Bank Vic |
2.49% |
| Fixed 5 years | Bank Vic |
2.59% |
| variable | Reduce home loans |
1.77% |
Source: RateCity.com.au. Note Rates are for owner-occupiers paying principal and interest, LVR requirements apply to some loans.