The Reserve Bank of Australia (RBA) made its April 2022 Monetary Policy Decision announcement yesterday. And while the information contained can be dense and the policies complicated, they are very important to all Australian mortgage holders, whether investors or owner occupiers. This is especially true when it comes to whether or not interest rates are on the rise.
So, we’ve pulled together the information that particularly matters for us as mortgage holders. Let’s dive in.
RBA April 2022 Monetary Policy Decision
The RBA announced this week that they would continue to hold the record low 0.1% cash rate for the 16th month running. This is a great initial result for mortgagees. However, investors and home owners should be aware – it may not be for long.
RBA governor, Dr Philip Lowe, announced that the RBA would maintain current rates, but emphasised that ongoing global factors would be contributing to upward pressure on interest rates. Importantly, the newest announcement no longer uses the phrase, “the board is prepared to be patient”.
In light of these pressures, and the more urgent language from the RBA, we can expect rate hikes to appear as soon as May or June of this year. The RBA itself says that “expectations of future policy interest rates have increased”, leading us to expect this change is more imminent than ever.
The Impact of Global Factors
Global factors impacting a possible rate hike are wide and varied. They include the sharp increase in inflation around the world and Russia’s invasion of the Ukraine. They also continue to be impacted by continued recovery efforts from pandemic economic conditions and supply chain disruptions worldwide. These impacts continue and will continue for the foreseeable future.
The Australian Economy
The RBA believes, however, that the Australian economy itself remains robust and resilient, and is recovering well from the Omicron variant. Research shows that households and businesses are doing well in terms of cashflow, there is more business investment occurring and macroeconomic policies are supporting more growth and a higher national income. Tellingly, unemployment has also fallen to an extremely low 4%, the lowest it’s been since August 2008.
The RBA also reports that wages growth has finally begun to pick up speed – good news for all Australian employees – though it remains low compared to pre-pandemic levels. A gradual increase is anticipated given the tight labour market though no one is sure precisely how the extremely low unemployment levels will impact this growth.
Australia has also experienced some inflation, though this is low compared to other countries around the globe. It currently sits at 2.6%, a number which will be driven higher as a result of higher prices of petrol and other commodities that are being impacted by supply chain factors, increases in global energy markets and increasing overall labour costs.
The Consumer Price Index
The Consumer Price Index (CPI) (which measures household inflation and expenditures) will come out at the end of April. And the results of this index will inform the rate hike as well. Experts believe that it is likely to have risen quite steeply since last reported. This could push forward possible rate hikes in the middle of the year. Wage growth will contribute to this as well.
The Board’s Policies
The Board continues to report its goals of full employment and targeted inflation. As part of these policies, the Board was focused on finding actual evidence that inflation is sustainably within the 2 to 3% target range. It was only at that point that it would consider increasing interest rates.
Latest numbers fall within those targets, further informing our belief that interest rate rises are on the way.
The Australian property market is currently facing a slower price growth than what we’ve seen over the last few years. However, this is less to do with the potential for rate increases, and more to do with affordability constraints. In short, we’ve hit the peak of the market. More sellers have put homes up for sale, looking to cash in on incredible sales price opportunities and this has brought supply and demand in line and put pressure on what some have seen as runaway price growth.
Impacts on Mortgage Holders
In terms of lending impacts, most banks will have factored additional interest rate rises into their lending decisions. But many homeowners will never have faced this kind of hike before. This will lead to impacts that are both psychological and monetary.
CBA forecasts that rate hikes for ‘average borrowers’ could see repayments rise by around $300 per month by early 2023. A RateCity survey found that almost a third of borrowers would have to implement cut backs in their spending in order to afford rising interest rates on their current mortgages. A full 14% believed they wouldn’t be able to afford repayments at all.
Steps to Take
With interest rate hikes imminent, it’s time to ensure that your mortgage and financing is well in hand. You may want to take steps to pay off your mortgage, of course. But, if you’re like most Australians, you’ll want to also consider refinancing with a loan that is better suited to your situation, including any changes that could occur in the situation of an interest rate rise.
Whether you’re a first-home buyer or an investor, you want to know, first, that you can afford your repayments, and second, that your lifestyle won’t be impacted too seriously (you don’t want to have to give up that gym membership!). You might want to consider a fixed rate mortgage. Or you might simply find a lender that is offering you a better deal with lower repayments.
No one can know for sure what the future holds. But these are steps that you should explore as soon as possible so you’re prepared when changes do occur. Our experts can help keep you in your home and in the lifestyle you want.