Monthly mortgage payments could increase by $1,000 by year-end

Homeowners with $500,000 mortgages could face nearly $1,000 in monthly payment hikes by the end of the year, according to Canstar, as the Reserve Bank hikes rates to curb inflation.

With the RBA in hawkish sentiment, another 0.5 percentage point could be added to the interest rate target at next Tuesday’s board meeting.

That would feed into mortgage rates, raising the average standard mortgage rate on a $500,000 loan to 4.83 percent. That, in turn, would result in borrowers shelling out $2,640 a month in repayments.

Not everyone sees the RBA pulling the 0.5 percentage point trigger at Tuesday’s meeting, with the NAB and CBA believing the rise will be 0.25 percentage points.

But the more dovish economists at ANZ and Westpac believe rates will continue to rise as the RBA hiked interest rates by a full percentage point between May and year-end.

CBA says we’ll only see a 0.5 percentage point increase through year-end, while NAB says it’ll be 0.75 percentage point.

But whatever happens, homeowners will suffer.

If Westpac and ANZ are right, homeowners with a $500.00 adjustable-rate mortgage will see monthly repayment costs of $969. If the NAB is right, the increase is $726 per month, and if the CBA is right, it’s $484.

Canstar chief commentator Steve Mickenbecker believes the RBA will hit hard with a 0.5 percentage point gain in October.

“I think they have no reason to back down from their recent comments and they’re still worried about the inflationary genie coming out of the bottle,” he said.

That makes him nervous. “People could be making $1,000 more a month pretty soon, and that’s a huge increase when wages go up just 3 percent,” Mr. Mickenbecker said.

Some believe the RBA is too trigger-happy and a 0.5 percentage point hike in October is unjustified.

“People get excited and say, ‘The rest of the world is going up faster, so we should be up 0.5 percentage points now,'” said independent economist Nicki Hutley.

Inflation in Australia is below international levels.

“The US and the UK are in very different circumstances and if I were the Reserve Bank board I would say 0.25 percentage point is fine,” Ms Hutley said.

Raising rates by another 0.5 percentage point “risks, in my view, being overkill,” she said.

“Retail numbers are holding up, but people are making ends meet very quickly with their savings.”

Earlier in the year, RBA Governor Philip Lowe said Australians had a record $280 billion in savings. However, the savings rate fell from 19.8 percent in June 2021 to 8.7 percent in June 2022.

This, coupled with high retail spending, means savings will be eroded rather than replaced and rising interest rates will combine to weaken the economy, Ms Hutley said.

Regardless of the size of Tuesday’s RBA move, interest rates are moving and people are feeling the pain.

“All indicators [on home loan levels] are pointing downwards except for the refinancing,” said Mickenbecker.

That means rising rates could deter homebuyers and see some people who bought with negative equity in the last 18 months if home prices fall, Mr Mickenbecker said.

“That’s going to put people in the awkward position of not having refinancing options, not having equity and having big, fat loans,” Mickenbecker said.

What to do?

For homeowners who have been in the market for some time, refinancing could be a viable option.

“If you go back five or 10 years, the big banks were offering package loans at a 0.7 percent discount to the standard variable rate,” Mr. Mickenbecker said.

These packages included the loan, a contra account, a credit card, and a transaction account.

However, the world has changed, and the average package mortgage now carries an interest rate of 5.7 percent at the big four banks.

This is well above an average standard variable loan with an associated offsetting account, which is 4.33 percent.

“Unless you’ve renegotiated with your bank and you have a package loan, you’re paying way too much — hundreds of dollars — so you have to do something about it,” Mr. Mickenbecker said.

If you are in this position, contact the bank and seek refinancing.

Even with rising inflation and a likely slowdown in the economy, “there’s certainly no reason to panic about the R-word,” Ms Hutley said.

“If you’re worried about risk, I’d be more worried about inflation than recession right now.”

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