What’s going on with interest rates?
The Reserve Bank of Australia surprised many economic pundits in October with a smaller-than-expected 0.25 percentage point lift to the cash rate.
While this increase still puts pressure on many household budgets, it marks the first time since the RBA began its most recent tightening cycle in May that rates have risen by less than 0.50 percentage points.
Sadly, though, it’s unlikely we can expect an end to interest rate hikes, with RBA governor Philip Lowe signalling that the tightening cycle will continue in the monetary policy statement accompanying the decision.
“The board expects to increase interest rates further over the period ahead,” Dr Lowe said, with the size and timing “determined by the incoming data and the board's assessment of the outlook for inflation and the labour market”.
The RBA wants to bring actual inflation back down to its target range of between 2-3%. However, over the September quarter, it increased to 6.1%, up from 4.9% in the June quarter, according to the Australian Bureau of Statistics.
In light of this, the major banks adjusted their cash rate forecasts accordingly:
Westpac now expects the cash rate to peak at 3.60% by March 2023 before falling to 2.60% in 2024
ANZ thinks the cash rate will peak at 3.85% by May, before dropping to 2.85% in late 2024
NAB predicts a peak of 3.60% by March, followed by the rate remaining steady throughout next year
Commonwealth Bank predicts the cash rate will peak at 3.10 % by December
What does this mean if you are a homebuyer?
For every interest rate increase of 0.50 percentage points, your borrowing power falls by about 5% according to PropTrack, with the cumulative impact of the RBA’s hikes this year slashing about a fifth off the average person’s borrowing power.
This reduction in borrowing capacity is one of the main reasons why many Australian property markets have entered a downturn.
While the RBA has suggested that, ultimately, first home buyers could benefit from this impact of higher rates, by being able to enter the market at a lower price, this would be little comfort if you wanted to buy a property but were worried you couldn’t borrow enough.
If you’re in that position, visit an expert mortgage broker, as they will be able to recommend a suitable lender for your unique situation, helping to maximise your borrowing capacity.
What about homeowners?
Interest rate rises might increase the size of your repayments but, thankfully, you don’t have to take this lying down.
That’s because many lenders reserve their best rates for new customers – so you can give yourself an unofficial rate cut by refinancing (if your circumstances allow).
Looking for an award-winning mortgage broker in Sydney? Eventus Financial has over 340 five-star Google reviews and a very strong reputation. Schedule a no-obligation consultation with Alex to find out how we can help you.