Are Aussies prepared for even higher rates in 2023?

At the beginning of December the RBA gave an early "Christmas gift" with an increased cash rate of further 25 basis points to 3.10%, marking the largest rate tightening cycle since the early 2000s.

The increase follows signalling from the RBA it is committed to tackling the “scourge” of inflation, which has been shown to create lasting, detrimental effects on unemployment if not addressed with a strong monetary policy response.

Steve Mickenbecker, Finance Expert at Canstar commented:

"The Reserve Bank surprised no one with its announcement of another 0.25 percentage point increase in the cash rate in December.

Borrowers may have hoped for a little Christmas cheer from the RBA, but have been well-conditioned to expect the inevitability of an increase."

With forecasts for the cash rate to climb further, what can Australians do to be prepared for even higher rates in 2023?

Early signs of economic shift

Eliza Owen, CoreLogic Australia's Head of Research shared her insights:

"There are early signs of a slight shift in the Australian economy, with further slowdowns expected as monetary policy permeates spending decisions.

Though modest, retail sales declined through October (the first monthly decline in 2022), falling -0.2%.

Commodity prices have continued to ease, as have supply chain pressures.

New dwelling approvals continued to trend lower over October, and although rental markets remain very tight, the rate of growth in rental values has started to ease slightly in some markets.

Quarterly growth in capital city rents peaked at 3.1% in July, and has since eased to 2.5% in the three months to November."

However, there are still some indicators it is too early for a pause in the rate-tightening cycle.

In fact, the September quarter ABS business indicators data, released this week, reflected a 2.9% increase in wages and salaries, a growth rate not seen since 2007.

In October, labour force data showed continued growth in the number of people employed, and the unemployment rate fell 0.1 percentage points to 3.4%.

Eliza further explained:

"The impact of recent rate rises on housing is flowing through to lower volumes of new mortgage finance secured.

From May through to October of this year, the monthly value of secured finance declined -17.9%.

Annual sales volumes have trended -13.3% lower compared to this time last year.

Consumer sentiment through November also dropped a notable -6.9%."

What happens now?

In the Governor’s statement today, the RBA has confirmed there are further rate hikes to come to rein in inflation, although he reiterated that the Board “is not on a pre-set course”.

If lenders pass on the 0.25 percentage point hike, as expected, the average owner-occupier with a $500,000 loan and 25 years remaining will see their repayments rise by $75.

However, this is now the eighth rate hike in as many months.

For someone with a $500,000 debt at the start of the hikes in May of this year, their repayments will increase, in total, by $834.

Source: RateCity.com.au. Based on an owner-occupier paying principal and interest with 25 years remaining.
Starting rate is the RBA avg. existing owner-occupier variable rate of 2.86% in April and assumes banks pass the hikes on in full.

Well, after this hike, RateCity.com.au estimates:

• The average existing owner-occupier variable rate will be 5.86%.
• A competitive variable rate will be under 4.70% for owner-occupiers paying principal and interest, however, a handful of lenders are likely to offer rates under 4.50% still.

Can borrowers save by refinancing?

Sally Tindall, Research Director for RateCity.com.au shared her insights on refinancing:

"This is the RBA’s eighth hike in as many months, sending the cash rate to a decade-long high.

In November last year, APRA told the banks to start stress testing people’s loan applications to make sure they could still meet their repayments if rates rose by 3 percentage points.

Just over a year later, we’re already at this level with more hikes still to come.

Spend the summer getting your finances in order by understanding what your repayments will be after this hike, but also how high they could go next year.

If you know you won’t be able to make those higher repayments, take action now.

One of the most effective ways to inject ongoing relief into your budget is to refinance to a lower-rate lender.

Switching banks might seem as appealing as sticking pins in your eyes.

However, with many lenders now offering applications in less than an hour, it should leave people time to apply and still get to the beach.

If you can’t make the budget stack up, call your bank well before you miss a repayment to see what options you have.

Also spend some time getting independent financial advice"

For example, someone with a $500,000 debt today and 25 years remaining on their loan refinanced from the average variable rate to one of the lowest in the market, RateCity estimates they could save up to $19,451 in the next three years.

This includes the costs of refinancing and assumes the cash rate moves in line with Westpac’s forecasts.

Source: RateCity.com.au. Notes: based on an owner occupier paying principal and interest with 25 years remaining on their loan.
Assumes borrower is on the estimated average owner-occupier variable rate of 5.86% and moves to one of the estimated lowest variable rates on the RateCity.com.au database. Includes switching costs and assumes the cash rate continues to move in line with Westpac’s forecasts.

Someone with a $1 million loan refinancing from the average rate to one of the lowest could save an estimated $39,844 in the next three years.

Was the rate hike necessary?

HIA Chief Economist, Tim Reardon stated:

“The RBA will not restore the economy to stable growth by putting the housing industry through boom-and-bust cycles.

Home buyers have exited the new home market rapidly following the first increase in the cash rate in May.

The RBA should have paused to observe the impact of the fastest increase in a generation and not continued to raise rates

Home building was already set to slow significantly in 2023 and today’s rate rise will exacerbate this downturn."

About Brett Warren Brett Warren is National Director of Metropole Properties and uses his two decades of property investment experience to advise clients how to grow, protect and pass on their wealth through strategic property advice.