The End Of 50 Basis Point Increases
Was that the last super-sized 50 basis point increase? Some experts believe so and the next few Reserve Bank of Australia (RBA) increases will be by 25 basis points, a normal amount. These rate rises are tough to swallow when life is already expensive. This will mean that we will be able to borrow even less and our property prices will continue to fall. While each bank has passed previous rate increases on in full, they have different rules when it comes to how they apply the increases to their application and approval processes which we should know about.
5 months in a row and still more to come
It’s difficult to hear when the cost of living is already high that the RBA has increased the cash rate target again, by 50 basis points to 2.35 per cent. Yesterday, the 6th of September was the RBA’s 5th straight monthly cash rate increase. The RBA in this recent September monetary policy statement basically said that it’s hard to get the economy under control without increasing rates again. RBA Governor Dr Philip Lowe, emphasised that there are global challenges impacting prices and spending domestically has not yet changed. Further, the jobs market is tight with our unemployment rate at a 48 year low of 3.4 percent and expected to decline even further, with wages picking up. So the full effects of these rate rises haven't set in just yet. The economy is continuing to grow solidly, and based on this information Dr Lowe stated “the Board expects to increase interest rates further over the months ahead.”
The delay or lag in the response to these rate rises in the economy, is partly because “many households have built up large financial buffers and the saving rate remains higher than it was before the pandemic” Dr Lowe said. It is also because borrowers have their home loans still pegged to low fixed rates. Leading industry experts believe as soon as these households come off their fixed rates that are at high 1’s and low 2’s, we are likely to start witnessing the broader pinch. Some of these loans will see their rates and repayments reset to double the amount they were paying before.
Rate rises to continue, but at a slower pace
There’s a consistent notion developing amongst chief economists that this cash rate of 2.35 per cent is a “neutral zone”, where the RBA’s policy is not stimulating or slowing down the economy. This means that the next rate rises will be more modest but the data associated with consumer confidence, cost of living, and employment will be determining factors here, over the coming months. This Thursday, 9th of September, the RBA Governor will discuss inflation and monetary policy and may be able to give us a better idea of what’s to come but it is generally thought that each rate rise from here, will be by 25 basis points.
Impacts to Australian dwelling values
National home values fell by 3.4 percent in the 3 months to August 2022, which is the biggest quarterly decline in home values since the 1980’s, according to Corelogic – a direct result of these rate rises.
Repayments
In terms of impacts to repayments, on variable, principal and interest (P&I) monthly repayments for your home loan (owner occupied), this recent increase of .5 of a per cent, will equate to:
- an extra $143, on $500,000. Or $609 extra per month, since rate rises started in May 2022
- an extra $215, on $750,000, or $913 extra per month, since rate rises started in May 2022
- an extra $287, on $1,000,000, or $1,218 extra per month, since rate rises started in May 2022
Note: Adopted a rate increase of .50 per cent, increasing 3.69 per cent to 4.19 per cent, making P&I repayments over a 30-year term. Then, we compared these new rates, to what the competitive variable rates in May 2022 were, being 1.94 per cent.
Effects on borrowing capacity
Interestingly, if we look at the impact of this most recent rate rise in September, it reduces our borrowing capacity as follows:-
Example 1
- prior to this September 2022 rate rise, a household of 2 people earning $145,000 were able to borrow $750,000. After this most recent 50 basis point increase, we could borrow $715,000, or $35,000 less
Example 2
- prior to this September 2022 rate rise, a household of 2 people on $180,000 were able to borrow $1,000,000. After this most recent 50 basis point increase, we could borrow $955,000, or $45,000 less
Each month, the impacts aren’t that bad, but what is clear to see here, is that after multiple rate rises, a borrower is able to borrow a lot less.
Different lenders adopting different rules
Some lenders have different rules when applying these rates to their assessment rates and approvals.
Some lenders will honour & approve the loan amount and rate applied for at the date of submission. So it doesn’t matter if the rates change between submission and pre-approval, or in 2 months time after another 2 rate rises, they will honour our loan amount and assessment rate, at the date of submission.
Others will honour the loan amount and assessment rate, at the date of pre approval.
Other lenders, will only honour the loan amount and assessment rate, at the date of formal approval. So on this last point, it doesn't matter if you've lodged before the rate change, or been pre approved before the rate change, the assessment rate on the day of formal approval, is what will apply. We explored assessment rates previously, see the third heading in the blog here.
Final thoughts
Inflationary pressures will continue here in Australia for the foreseeable future but it’s comforting for borrowers to know, that there is momentum building amongst leading experts that these rate rises are likely to slow. While loan repayments will continue to increase and borrowing capacities will be impacted, the detrimental impacts are looking to be less severe now. It’s just about ensuring your lending solution is in your best interests to tackle this challenging period and that each loan application is with the lender who’s rules meet your specific timing requirements.
We've worked very hard to create long-lasting, fostered relationships with all the 30 plus lenders on our panel, to ensure all our borrowers here at Black & White Finance are on the best terms available. Our finance strategies now more so than ever, need to be smart and in our best interests, to tackle this inflationary economic landscape.
If you want to know more about the different rates, terms, or bank specials on offer at the moment or just have a general question, please send a note to peter@blackandwhitefinance.com.au or click the start today button a little lower. With the help of our amazing Mortgage Broker Sydney – Black and White Finance team, we will be able to support you.
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