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The Reserve Bank has aligned with industry expectations and raised the cash rate, but brokers have been told to watch for how lenders respond.
The Reserve Bank of Australia (RBA) raised the cash rate on Tuesday (3 May), increasing it from the historic low of 0.1 per cent, up by 25 bps to 0.35 per cent.
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The increase was the first for the cash rate in almost 12 years and the first movement since it was slashed from 0.25 per cent in November 2020.
The RBA had responded to a surge in inflation, as it accelerated to 5.1 per cent in the year to March (or 3.7 per cent in underlying terms).
In a speech on the monetary policy decision, RBA governor Philip Lowe commented the board had decided now was an “appropriate” time to begin normalising the rate.
Dr Lowe also flagged that the cash rate increase will be the first of a series of rises.
“Notwithstanding these uncertainties, I expect that further increases in interest rates will be necessary over the months ahead,” Dr Lowe said.
“The board is not on a pre-set path and will be guided by the evidence and data as it takes the necessary steps to achieve the medium-term inflation target and support full employment in Australia.”
Brokers needed as banks lift rates
While fixed-rate product pricing has already begun to rise, the decision means lenders will begin to increase their variable home loan rates.
Indeed, all four major banks (ANZ, CBA, NAB and Westpac) have all already announced they would be raising rates by the fill 25 basis points.
Eyeing the start of rate rises, Peter White, managing director of the Finance Brokers Association of Australia (FBAA) commented brokers must now “shine a spotlight on the future behaviour of the banks”.
The industry body head has also called on the government to ensure banks do not raise mortgage rates unless they prove the cost of funds has risen.
“From past experience we know that some banks will look to use these opportunities to maximise their profits at the expense of mortgage holders,” Mr White said.
“It is imperative that banks do not increase their rates outside of increases in the costs of funds, because many Australians cannot afford sudden and steep rate increases.”
An FBAA survey from last year showed that 75 per cent of consumers believed rising interest rates would place pressure on their financial position, while 56 per cent said they would need to look at refinancing their home.
More than half (57 per cent) paying a mortgage or rent said they could “not at all” afford a $300 per month increase, which the FBAA figured to be equivalent to a 1 per cent uptick for an average home loan.
A newer CoreLogic analysis has tipped that under a 100-bp increase in variable mortgage rates, a new borrower in Sydney could be facing a rise in monthly mortgage costs of $486, while under a 200-bp increase, monthly mortgage costs could be $1,005 higher than current levels.
At a national level, CoreLogic has calculated a 100-bp rate increase would result in around $323 extra in monthly costs, or an additional $668 under a 200-bp rise.
Meanwhile Joust chief executive Carl Hammerschmidt has estimated a 25-bp rise on an average home loan of around $600,000 could mean an additional $1,500 per annum in interest charges.
“We may now see rate rises each month to the end of the year of somewhere between 15-25bps each step and this will bring forward future mortgage stress and financial hardship for many,” Mr White said.
“My message to finance and mortgage brokers is to connect with your clients now and offer guidance and support.
“We should be explaining to consumers that only brokers must by legislation ensure that we act in their best interests.”
Mr Hammerschmidt from Joust similarly noted borrowers should “keep an eye on what their lender decides to in response to the RBA raising the cash rate, as individual institutions don’t typically mirror the cash rate rise”.
“For those not prepared, not with savings or without an income to cover these increases, the impact could be significant,” he said.
Similarly, Mortgage Choice national sales director David Zammit stated: “The question now is – which lenders will be the first to pass on the rise to borrowers?”
The election and beyond
Housing affordability and the rising costs of living will be some of the key issues facing voters in the upcoming election, Mr Zammit asserted.
“More than 1 million of Australia’s property owners have never experienced a rising interest rate environment, and with the Reserve Bank expected to raise the cash rate more than once this year it’s understandable that today’s decision will leave many feeling uncertain,” Mr Zammit said.
“Mortgage brokers will play an important role helping borrowers navigate the changes ahead.”
But CoreLogic reported higher interest rates are also expected to add to the downwards pressure on house price growth, which had already lost steam across Sydney and Melbourne.
Previous research from the RBA indicated a 2 per cent rise in the interest rate over the next two years could lead to a 15 per cent drop in national house prices.
Looking to the near-term, Simon Bednar, CEO of Finsure Group, has predicted there will be another 25-bp uptick in June, followed by two further increases for the year. In his scenario, rates could reach at least 1 per cent by the end of the year.
A survey of mortgage brokers from Hashching earlier this week showed the majority (56 per cent) of industry respondents expected a May rate rise.
[Related: Brokers fear ‘trouble ahead as rate rise expected]
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