What a difference a year makes!

It would have come as no surprise to anyone that the Reserve Bank of Australia would increase the cash rate at yesterday’s monthly meeting.

But what does this mean in real terms for current and future borrowers?

For three months in a row, after years of easing interest rates, the RBA has increased the cash rate in a bid to combat inflation. Since the end of lockdowns and the onset of the Russian-Ukraine war, inflation on essential goods such as fuel and food has steadily risen leaving many feeling the squeeze of both increased costs and debt.

Lenders will most likely pass on the rate hike in full, resulting in the average variable mortgage rate for a new owner occupier loan being around 3.66% (up from 2.41% in April).

For a borrower with a $500,000 housing debt, with principal and interest (P&I) repayments on a variable rate mortgage, the average monthly repayment would have risen approximately $366 per month since rates started rising. For a $1 million loan balance, repayments would be up around $732 per month.

The RBA is doing a delicate dance with raising interest rates; trying to control inflation while mindful of not applying unmanageable financial stress on mortgage holders. The level of susceptibility to mortgage stress varies between capital cities and even between regions within the capital cities.

As reported recently in the Domain, the 2021 census revealed seven Sydney local government areas disproportionately exposed to higher borrowing costs: Burwood, where 25.9 per cent of home borrowers were already paying over 30 per cent of household income on mortgage repayments, Canterbury-Bankstown (25.6 per cent), Fairfield (25.4 per cent), Strathfield (25 per cent), Cumberland (24.7 per cent), Parramatta (24.3 per cent) and Georges River (23.9 per cent).

Conversely, the figure for the Inner West was 15.1%.

The census also identified suburban pockets with an especially high share of pressured borrowers. In south Campsie, four in 10 home borrowers (38.8 per cent) were paying over 30 per cent of household income on mortgage repayments. In many other suburbs across Sydney’s west and south-west, the proportion was around one-third, including Hurstville central (32.6), Guildford-South Granville (32.9 per cent) and Minto-St Andrews (32.3 per cent).

For those experiencing the pinch of increasing interest rates, more and more will need to forego spending on non-essential, discretionary items to avoid a forced sale on their home. The choice may come down to a change lifestyle or change of property.

Unfortunately, the trend of rising interest rates appears to be with us for at least another year as inflation looks to remain high. However, the accompanying trajectory of home values will depend on how fast and how high interest rates move, along with the performance of the broader Australian economy, labour markets and demographic trends.

For now, a strong economy and a super low unemployment rate are helping to protect the market from a steep decline and ensuing crisis for those on the brink. Properties are still selling well as sellers are readjusting to current market conditions.

A couple of things to remember here.

We never know when the market has hit its bottom until it is on the way back up.

There are always people looking to buy and sell

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Published August 8, 2022

By Belinda Cassano