Homeowners have been given another clip from the Reserve Bank after a month off from it’s run of interest rate hikes, with a 0.25 percentage point rise for the month of May.
The rate hike has shocked many, with fears growing the higher rates will send the country into recession.
It is the 11th interest rate rise to hit mortgage borrowers in the last 12 months and represents another blow to household budgets, many of which are already under strain from skyrocketing cost of living pressures.
The current official cash rate of 3.85 per cent is well above the current lending buffer test of 3 per cent set by the Australian Prudential Regulation Authority, meaning many homeowners will be feeling the pinch when it comes to servicing their loans.
AMP chief economist Shane Oliver explained what the hike means in real terms for homeowners when he spoke to the ABC.
“A variable rate borrower with a $600,000 mortgage will see roughly another $99 added to their monthly mortgage payment from Tuesday’s RBA hike, which will take the total increase in their monthly payments since April to around $1,200 a month,” he said.
“That’s an extra $14,250 a year, which is a massive hit to household spending power.
“Many of those on fixed rates will start to experience that increase this quarter and next.
“Don’t forget that the RBA estimates that 15 per cent of variable rate borrowers will move into negative cash flow [with after-tax income below essential living expenses and mortgage payments] by year’s end if the cash rate rises to 3.75 per cent and we have now surpassed that.”
According to the RBA’s Financial Stability Review, it’s the loans that were taken out at very low variable rates between March 2020 and April 2022 that are most at risk.
“Given the increase in interest rates since these mortgages were taken out, these borrowers’ scheduled payments are now more likely to be close to or above the maximum level that their lender assessed they could afford when the loan was originated,” the report says.
“These borrowers are also less likely to hold savings outside their mortgages than comparable fixed-rate borrowers.”
Ahead of the Federal Budget, Treasurer Jim Chalmers said the rate hike was a shock to the system for many Australian households.
“This is a really difficult decision for a lot of Australians, who are already under the pump,” he said.
“This is a reminder of the difficult economic conditions in which we frame this second budget.
“I think that the rate rise is really a pretty stark, pretty brutal reminder of the difficult economic conditions we confront as we finalise the budget.”
Amid the doom and gloom, the Reserve Bank says it is aware of the struggles of households and homeowners and of its difficulties trying to rein in inflation.
“A significant source of uncertainty continues to be the outlook for household consumption,” the RBA said in its statement after the rate announcement.
“The combination of higher interest rates, cost-of-living pressures and the earlier decline in housing prices is leading to a substantial slowing in household spending.
“While some households have substantial savings buffers, others are experiencing a painful squeeze on their finances.”
In a reality check for homeowners, the RBA’s statement said it will continue to do what is necessary to reduce the inflation rate down from where it currently sits at around 7 per cent.
“The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”