The Reserve Bank of Australia has moved to raise interest rates from emergency lows at its meeting on May 3 to curb runaway inflation hitting households.
It is the first time in over a decade that the cash rate target has been raised, reinforcing expectations of falling property prices, particularly in Sydney and Melbourne.
Here’s what the measure means for homeowners with mortgages.
What is happening with variable loans?
Monthly mortgage payment increases will be relatively modest under the new 0.35% rate increase. But RBA Governor Philip Lowe has warned borrowers to brace for further hikes to bring inflation back into the target band.
With the new rate, the monthly payment on a $600,000 home loan would rise to $2,324, an increase of $74, Finder said.
For someone with a $1 million loan, the payments would increase by $130 per month.
But if the cash rate rises to 2% by May of next year, as Westpac predicted, RateCity said repayments for the average borrower with $500,000 in debt would increase by about $511.
CoreLogic research director Tim Lawless said that with a 100 basis point increase in variable mortgage rates, a new borrower in Sydney would face an increase in monthly mortgage costs of $486. With a 200 basis point increase, mortgage costs would be $1,005 higher than current levels.
Nationwide, a 100 basis point increase would result in a $323 increase in monthly mortgage costs, jumping to $668 with a 200 basis point increase.
“Previous research from the RBA has pointed out that ‘high-end’ property markets with higher concentrations of investors are more sensitive to changes in short-term interest rates,” Lawless said.
“This may be why the Sydney and Melbourne markets are already seeing price declines, with more affordable housing markets expected to eventually follow the downward trend.”
What about fixed rate loans?
Lawless said those with fixed-rate loans would be temporarily shielded from rate hikes, while the recent surge in fixed-term home loans would help protect homeowners.
“While they will need to refinance in the future, by that time, labor markets are likely to have tightened further and income growth has accelerated,” he said.
Lawless said mortgage distress is likely to be further minimized to some extent by serviceability assessments at the time the loans were made, and the fact that borrowers were generally well ahead of payments.
Finder senior money editor Sarah Megginson said the rate hike, coupled with a cooling housing market, would likely lead to more increases in home lending.
“Some recent buyers may be locked in now, or when their fixed rate ends,” he said.
How will this affect property prices?
Lawless said higher interest rates are likely to add further downward pressure on housing growth rates.
He said major capitals like Sydney and Melbourne were already “losing steam” due to affordability constraints, higher fixed-term mortgage rates and lower levels of consumer confidence.
“A higher cash rate means higher variable mortgage rates, a reduction in borrowing capacity and more stringent serviceability assessments for prospective borrowers,” he said.
Lawless said the extent of the housing market downturn depended on how high and how fast interest rates rose, in addition to a variety of other economic factors.
“Such a low unemployment rate, coupled with the expectation of higher income growth, should keep mortgage distress and forced sales relatively low,” he said.