RBA lifts cash rate to 4.60% as housing prices and new lending weaken

Australian mortgage holders face another increase in borrowing costs after the Reserve Bank lifted the cash rate target by 25 basis points to 4.60 per cent on Tuesday.

The decision takes the cash rate to its highest level since late 2011. All nine members of the RBA’s Monetary Policy Board supported the increase, reflecting concern that inflation remains too high and some of the risks identified at its August meeting are becoming reality.

The RBA said disruptions to global oil supplies had raised energy prices, while Australian businesses were reporting cost pressures and considering further price increases. Recent domestic growth and inflation figures had also been stronger than the bank expected.

For the property market, the increase adds pressure at both ends of a transaction. Existing variable-rate borrowers are likely to face higher repayments as lenders adjust their rates, while prospective buyers will generally qualify for smaller loans when assessed at higher interest rates.

What the rise could cost borrowers

ABC News reported that a 25-basis-point increase would add about $91 a month to repayments on a $600,000 variable-rate mortgage with 25 years remaining, based on Canstar calculations.

The precise change for an individual borrower will depend on the lender, loan balance, remaining term, repayment type and whether the bank passes on the full increase. Fixed-rate customers will generally avoid an immediate change until their fixed period expires, although the rates available when they refinance may be different.

Borrowers should check the effective date announced by their lender rather than assuming repayments change immediately. Banks may also recalculate the required direct debit at different times, meaning the higher amount may not appear in the first payment after an announcement.

Households with money in an offset account can reduce the interest charged without locking the funds away. Borrowers making repayments above their required minimum may also have some room to absorb the change before their regular transfer needs to rise.

Those already struggling should contact their lender early. Available options can vary but may include changing the repayment date, restructuring debts or applying for temporary hardship assistance. Extending a loan term can lower the immediate payment but usually increases the total interest paid over time.

Buyers lose more borrowing power

The rate increase also changes what many buyers can afford before they attend an auction or make an offer.

Canstar estimates reported by ABC News indicated that a person earning the average full-time wage could lose more than $47,000 in borrowing capacity, while a couple each earning that wage could lose nearly $95,000. Actual results will depend on expenses, debts, dependants, deposit size and each lender’s assessment policy.

That makes an updated loan assessment important for anyone relying on a pre-approval obtained before the rate decision. A pre-approval is normally conditional, and a lender can reassess an application if interest rates or the applicant’s circumstances change.

Falling property prices do not necessarily cancel out the effect. A cheaper asking price helps with the deposit and purchase amount, but a smaller approved loan can still force buyers to target a different suburb, dwelling type or price bracket.

The RBA acknowledges the housing slowdown

The RBA’s statement said housing prices had fallen in most capital cities and new housing loans had declined noticeably. It also noted uncertainty about the broader economic effects of the housing downturn.

Even so, the board judged that another increase was necessary to prevent elevated inflation becoming entrenched. It said further increases remained possible if needed, rather than signalling that Tuesday’s move would be the last of the cycle.

For sellers, this is likely to reinforce price sensitivity among buyers. Vendors may encounter fewer bidders, tighter finance conditions and longer negotiations, particularly where comparable sales are already moving lower.

Renters are affected less directly, but higher financing costs can influence investor decisions and the viability of new rental construction. A landlord’s mortgage increase does not automatically determine the rent a property can achieve; local supply, demand and applicable tenancy rules remain important.

What it means for you

• Variable-rate borrowers should check their lender’s effective date and calculate the new repayment before it begins.
• Buyers with an older pre-approval should have their borrowing limit reassessed before bidding or exchanging contracts.
• Sellers should use recent comparable sales and allow for buyers operating with smaller finance approvals.
• Anyone facing repayment stress should contact their lender before missing a payment.