RBA makes third rate rise
The Reserve Bank of Australia (RBA) has raised rates by 0.50%, its third rate rise this year.
Rates now stand at 1.35%, up from 0.85% in June.
RBA governor, Philip Lowe, said the decision had been taken to raise rates due to high global inflation.
“Global inflation is high. It is being boosted by COVID-related disruptions to supply chains, the war in Ukraine and strong demand which is putting pressure on productive capacity. Monetary policy globally is responding to this higher inflation, although it will be some time yet before inflation returns to target in most countries,” he said.
Lowe said inflation in Australia was also high, but not as high as it was in many other countries.
“Global factors account for much of the increase in inflation in Australia, but domestic factors are also playing a role. Strong demand, a tight labour market and capacity constraints in some sectors are contributing to the upward pressure on prices. The floods are also affecting some prices.”
It was expected in the run-up to the decision that rates would be raised by 50bps as Lowe had previously stated that July’s meeting would be a choice between 25bps or 50bps rather than 75bps like the Federal Reserve.
Many investment experts are saying that the RBA like many central banks is finding itself searching for the ‘least bad’ approach. Having potentially let the inflation genie out of the bottle, it is not an easy task to catch the genie and get it back into the bottle, without tipping the economy into recession.
THE RBA Governor, Phillip Lowe noted in a speech last month “Australians should be prepared for more interest rate increases, with the level of interest rates is still very low, with the RBA committed to doing what is necessary to ensure that inflation returns to the 2-3% target range.”
Lowe has previously stated that he expects inflation to peak at 7% before falling back at the end of the year., while interest rates could reach as high as 2.5% by the end of 2022.
Australians are reacting as they start to pull their belts a little tighter, this coupled with buyers continuously being re-rated is having an effect on the property markets, as many are sitting on the sidelines with the uncertainty surrounding interest rates.
We are seeing auction clearance rates falling, time on market increasing, with less qualified buyers ensuring that some vendors are taking discounts on current listed prices.
We will see this start to ramp up towards the end of the year. Where those with an LVR above 90% starting to feel the pinch.
However, looking at the overall market data, we see the average LVR for the country sitting at 21%. This is a bit skewed as when you dive deeper into the numbers, you see that a large proportion of our population is baby boomers, whom are retired with their home unencumbered.
What does this mean for interest rates?
We saw the CBA last week raise all their fixed interest loan rates by a whopping 1.40%.
With CBA 5 year fixed rates now sitting at 6.69%.
This provides a good indication of where rates are heading. However, our Newcastle Financial Planning Advisors believe that fixing rates now my not be in your best interest. As potentially you will be paying significantly more between now and when rates hit 6.69% (which could potentially occur in 4-5 years).
However, many experts are predicting that interest rate hikes will start to slow and potentially cease towards the end of the year, as supply chain issues are resolved, as many economies around the world teeter on the brink of recession.
Current standard variable rates are around 2.5-3%, depending on your LVR. Those with an LVR under 70% are getting rewarded by the banks with lower rates. Those between 70-80% are still being offered competitive rates. However, those home owners with LVR above 80% are having a risk premium added to their interest rates. Given properties in Sydney are off 2.8% for the past quarter, many banks are predicting further property price falls and want to protect themselves against defaults in their residential property loan portfolio.
Furthermore, with today’s increase, standard variable rates will be pushed to 3-3.5% as banks start to see their funding rates increase (that being where they get their loans/money from).
Furthermore, the RBA Governor is stating there could potentially be another 1-1.2% rise before the end of the year. Meaning rates could move to 4-4.7% before the end of the year.
In the past three months, many mortgage holders have had an increase in repayments of 1.25%.
For a $500,000 loan this has been an increase in repayments by approximately $340 per month.
Or on a $1,000,000 loan this has been an increase in repayments by approximately $681 per month.
Therefore, by the end of the year, we are expecting a 2.25-2.45% rise from April 2022.
For a $500,000 loan this has been an increase in repayments by approximately $622 per month.
Or on a $1,000,000 loan this has been an increase in repayments by approximately $1,247 per month.
An extra $600-1,200 per month in mortgage repayments are going to hurt a lot of families that are unprepared.
Now is the time to start putting a plan in place so you can ensure you enjoy Christmas with your family in your home.
We need to be prepared.
For many it may be the first time you have needed to tighten the belt, for others your foundations are set and it is a matter of pulling the different levers in place.
However, for the past six-eight months we have been supporting our clients with:
reviewing your mortgage
getting valuations if you are looking to invest
refinancing and considering fixing a proportion of your loan (leaving the amount you will repay over the next 2-3 years as variable)
reviewing your budget
analysing your spending and for some looking to reduce from 70-80% down to 40-50%.
establishing a buffer or emergency account
having a buffer in your offset account
reviewing your personal insurances, to ensure if you are injured, ill or pass, your family are still financially secure
In addition, the other main consideration we are currently supporting with is blocking out the white noise.
News outlets are there to sell and have a habitat of selling FEAR.
Our role is to support our clients in their financial behaviours and really take the emotion out of financial decisions.
As you don’t want to be using short term metrics to make long term decisions.
Should you have any questions or concerns, please reach out to our Warners Bay Financial Planning Advisers.
We are available for meetings in our Warners Bay office, our Sydney office or online.