It was no surprise, but the RBA’s tenth successive interest rate rise this week will be another unwelcome shock to many Australian households.
With inflation at 7.8% and wages only growing at 3.6%, the average Australian is already struggling with a higher cost of living but for those who also have mortgages it is even tougher.
In its ongoing crusade against inflation, which it targets at between 2% and 3%, the Reserve Bank has racheted up its official rates to 3.6% and signalled there might be one more to come. Not that long ago official rates were at 0.10%.
Around 3.5% of Australia’s 10 million homes are mortgaged to the banks, and the pressure keeps mounting.
Of most concern are the 800,000 who have loans which are about to switch from fixed to a new, much higher variable. How many will need to refinance or sell is yet to be seen.
Mortgage rates are always higher than the RBA’s cash rate because commercial banks need margins, so the latest rate rise should push mortgage rates to 6% and beyond for people who have not yet refinanced or done a deal with their bank.
At 6.39%, which is the CBA’s standard variable loan rate this week, a family with a $500,000 loan will be paying $3125 per month in repayments in principal and interest.
Before the RBA started hiking rates mortgages could be had at around 2.5%, and repayments would have been $1976 per month
That’s a rise of $1,149.
So while the RBA rate hikes might seem small, and yes rates are a long way from the 7% they were during the Global Financial Crisis, the cumulative impact is very painful especially when compounded by inflation and slow wages growth.
So, what can households do to lessen that pain?
Number one, people should talk to their banks, threaten to take their business elsewhere and demand a better deal.
Rates might be going up but it’s still a highly competitive market, and the banks desperately want the business.
It might be time to consider fixing at least part of the mortgage to establish some certainty.
Once the best possible rate is secured, it’s time to audit the household finances and identify possible areas of saving. Then there’s the potential for side hustles and other sources of income.
What if there is a millennial or Gen Z person living in the house who isn’t paying rent or board?
They might be saving for their own home but they won’t be able to get too much help if the Bank of Mum and Dad is struggling and can’t pay its own way. Perhaps it’s time for the generations to pull together?
Everyone’s situation will be different but the worst thing to do as rates go higher is to do nothing and suddenly find that the payments can’t be met.
There are a range of measures that can be taken to tweak outgoings and enhance income to improve the balance sheet and ensure survival at this difficult time.
The pundits, and the RBA Governor and the Federal Treasurer, are often wrong but the consensus is that inflation may have peaked and we may get only one more rate rise.
That would suggest that even though things are uncomfortable now, this might be as bad as it gets. That’s not much solace, but it’s the most positive outlook to take from the current market.
One pundit even suggested rates may come down…on Melbourne Cup Day.
Good luck with that.