Reserve Bank delivers unwelcome gift to borrowers

December 06, 2022

At its December monetary policy meeting, the Reserve Bank of Australia raised the nation's official cash rate by 25 basis points to 3.10%.

Speaking about the decision, Mortgage Choice CEO Anthony Waldron said, "The Reserve Bank has ended the year with another cash rate rise. Today's decision marks the eighth cash rate hike since May, a trend which has meant significant adjustments for borrowers on variable rate home loans."

Reserve Bank data shows that a large volume of fixed-rate loans will expire next year. Around two-thirds of outstanding home loans are currently on fixed-rate terms and two-thirds of these are set to expire by the end of 2023. These borrowers could see their home loan interest rate increase by 3-4% when their fixed term ends and they move to a variable rate.

"It's important borrowers coming off fixed rates are prepared for the change. Our Mortgage Choice brokers are actively talking to borrowers who fixed their rate in the last couple of years to help them prepare for the shock of moving onto rates that might be double what they've been paying. And it's not as simple as re-fixing your rate because fixed rate pricing has shot up in the last two years."

Mortgage Choice loan submission data reveals that demand for variable interest rates remains strong. During November, 95% of all loans submitted by Mortgage Choice brokers had a variable interest rate - a stark contrast to November 2021 when borrowers could still access fixed rates of 2%, and 35% of loans submitted by Mortgage Choice brokers had a fixed-rate component.

Rising interest rates continue to put pressure on the housing market. The PropTrack Home Price Index revealed that national home price falls accelerated in the last month of Spring, with national prices recording a 0.16% drop in November. Prices fell in nearly every capital city, with Darwin (-0.49%) and Melbourne (-0.33) recording the largest falls.

PropTrack economist Eleanor Creagh said, "The fastest rise to the cash rate since the 1990s has quickly rebalanced the housing market from last year's extreme growth levels, with prices falling in most parts of the country. Prices nationally are now sitting 3.81% below their March peak after falling for the eighth month in a row amid headwinds from monetary tightening.

"With additional rate rises on the horizon, borrowing costs will continue to increase and maximum borrowing capacities will be further reduced, shrinking buyers' budgets. Now the cash rate is sitting at 3.10%, with the substantial 300 basis points of tightening pushed through to date, maximum borrowing capacities have dropped by more than 20%. The significant reduction in borrowing capacities implies further price falls. It will take time for higher interest rates to fully affect prices, so property prices are likely to continue to fall as interest rates continue to rise."

Mr Waldron said, "Lenders will likely reflect today's cash rate rise in their variable rate home loan products, but borrowers can take some comfort in knowing that the Reserve Bank doesn't meet in January. That said, I expect further rate hikes early next year which makes now a good time to take stock of your finances and to meet with your broker to review your home loan, especially if your fixed rate will end in 2023."