This week’s Reserve Bank of Australia’s cash rate hike has meant Australian borrowers are reaching the end of their savings buffers.
The official cash rate increased by 25 basis points to 3.35 per cent at its February board meeting and there have been indications that it will keep rising over 2023.
In 2022, the RBA hiked the cash rate eight times as a means to qualm the country’s soaring inflation in line.
But what does this mean for Australians?
The RBA’s Financial Stability Review gave Aussies a picture of what households might look like in the years to come. The review found that if cash rates peak at 3.6 per cent, just over half of the households who are currently paying off variable mortgage rates will see their spare cash flow fall by more than 20 per cent.
The review also found that 15 per cent of owner-occupiers may find themselves with “negative cash flows” and may be forced to draw on their savings to afford home loan repayments as well as essentials like groceries and bills.
The RBA also said, while a “relatively small” share of households appear to be at high risk of falling behind on repayments, many borrowers may need to tighten their belts for several years to come.
“Most borrowers will likely be able to manage for at least two years by reducing their non-essential spending, reducing their saving flows, and/or drawing down on their accumulated prepayment buffers,” said the RBA.
“Should labour and housing market conditions deteriorate further than assumed in the Bank’s central scenario, however, a larger share of households would be expected to fall into arrears on their mortgages.”
How could the cash rate affect your mortgage?
According to Canstar Research, they crunched the numbers to find out how much more the average borrower can expect to pay.
They looked at how much more expensive the average variable mortgage rate might be compared now to what it was to April of last year.
The below calculations show how much more a borrower with a $500,000, $750,000 and $1,000,000 home loan might expect to pay each month, assuming that their mortgage is on an average variable rate and that their lender has passed on each of the earlier cash rate hikes in full (and made no other rate changes).
How could this cash rate hike affect a $500,000 home loan?
- 25 percentage point rate rise: $81 more in monthly repayments, and $969 total since April 2022.
How could this cash rate hike affect a $750,000 home loan?
- 25 percentage point rate rise: $121 more in monthly repayments, and $1,454 total since April 2022.
How could this cash rate hike affect a $1,000,000 home loan?
- 25 percentage point rate rise: $161 more in monthly repayments, and $1,939 total since April 2022.