As was widely anticipated, the Reserve Bank of Australia has increased the cash rate target from 0.1% to 0.35% following its board meeting on 3 May 2022 – the first rate rise since November 2010. All major banks have since passed on the full 0.25% increase to their variable rate home loan customers.
In this blog post, we outline some steps which borrowers can consider taking, to proactively prepare for and manage their home loans at this turn of the interest rate cycle.
Context of the recent rate rise
The decision was based on the central bank’s view that “it is the right time” to start pulling back some of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic.
The factors supporting the central bank’s view to begin the process of “normalising monetary conditions” include:
- An economy that is proven to be resilient and for which outlook remains positive;
- That inflation has picked up more quickly and to a higher level, than was expected;
- That there is evidence from the central bank’s business liaison that wages growth is picking up; and
- The very low level of prevailing interest rates.
Follow this link for the full RBA media release statement:
Statement by Philip Lowe, Governor: Monetary Policy Decision | Media Releases
When your variable interest rate will rise
Within 24 hours, all major banks raised their variable headline rates for residential home loans for investors and owner occupiers. The banks have unanimously passed on the full 0.25% increase across both P&I and IO loan types. This means that, if you have a loan split on a standard variable rate, your interest rate will automatically increase by 0.25%.
- ING – by 0.25% pa from May 10
- ANZ – by 0.25% from May 13
- NAB – by 0.25% from May 13
- Macquarie – by 0.25% from May 13
- AMP – by 0.25% from May 13
- WBC – by 0.25% from May 17
- St George – by 0.25% from May 17
- CBA – by 0.25% from May 20
This change in headline rates is the first time since March 2020 (NB: a decrease at that time), which was the start of the pandemic, although that time, the majors differed in the extent of rate cuts they were passing on across loan and product types. This time around, the banks have acted unanimously similar.
The latest headline rates of the major banks are outlined below:
Importantly, these rate increases are only the ‘first cut’. Rates are expected to increase throughout the rest of 2022. In Governor Phillip Lowe’s statement, it says the central bank is “committed to doing what is necessary to ensure that inflation in Australia returns to target over time”. This means that a further lift in interest rates “over the period ahead” will be required. The timing and extent of future rate rises will be dependent upon “incoming information” and “evolving balance of risks”.
How future rate rises will impact your repayment amounts
Assuming there are 25 years remaining in the loan term, and no loan offset facility in place, for a loan with an outstanding balance of $1M, the cash flow impact of a rate increase of 1.0% over the course of the year will be an additional monthly outlay of $520 (from 2.5% to 3.5%) or $6,240 for 12 months.
What is significant about this turn of the rate cycle
The context of this rate rise is that, rates have been as low as they have ever been in Australian history. It was just inevitable that, as part of the cycle of interest rate movements, that rates would go back up. The extraordinary monetary policy measures that were introduced that the start of the pandemic pushed mortgage interest rates below 2% for fixed rates.
A comparison of fixed interest rates for owner occupied home loans from May 2021 over a 12-month period shows that rates have on average doubled.
Many borrowers have benefited from fixing their loans fully or partially during the last season of rate reductions. At the start the pandemic, there were also a lot of measures that the banks offered to help borrowers ride the trough, such as loan repayment deferrals with no penalty or mark on the credit file.
The major banks, while keeping variable rates in tact until most recently, have actually adjusted their fixed rates (upwards) gradually since the beginning of 2022. Fixed mortgage rates have now surpassed variable rates. Therefore, at this turn of the rate cycle, fixed rates are no longer “the answer”.
What can borrowers and home buyers do in a way that is proactive in this current environment?
What borrowers can do in the current rate rise environment
In the current upswing cycle, we would recommend that clients consider the potential impact of rate increases on their cash flow and steps that can be taken to manage this. This is where you should check in with your broker or bank to identify planning opportunities for your current lending.
1. Cash flow management
The SF Capital Repayments Calculator on our website can assist you to work out how future rate raises may impact your loan repayments.
There are ways to reduce the impact on your cash flow:
- Maximise your loan’s offset account feature – it might be worthwhile reviewing the use of your offset account to maximise its benefit. Clients can consider parking spare savings from another savings account into the offset account, so as to offset as much interest expense as possible. While the offset feature does not reduce the overall P&I repayment per month, it does reduce the interest component of each repayment whereby allowing you to pay down the loan faster.
- Reviewing the amount of repayments you are making – clients who may be concerned about cashflow impact can adjust their repayments to the minimum repayment, if they are not already.
2. Restructure your loan
There are some restructure opportunities available, both of them involving either an internal or external refinance (and subject to passing servicing).
- Re-setting the loan to a full 30-year loan term – by restructuring your loan and re-setting it to a full 30-year term, repayments will be reduced to reflect an extension of the period of time it will take to fully pay down the loan. As an example, for a $750,000 mortgage, with a 25-year loan term remaining, monthly P&I repayments at 3.0% pa will come down from $3,557 to $3,162 after resetting the term to 30 years.
- Re-setting P&I repayments to Interest Only – borrowers can also consider switching their P&I loans to paying Interest Only to reduce the cash flow impact on their loan repayments, and hence to ride out this period in the rate cycle. Using the same example above, switching repayments to Interest Only will further reduce monthly repayments from $3,162 to $2,500 only.
3. Get ahead of your loans
For property portfolio investors who may be concerned about a big hit on their cash flow, subject to advice from your investment advisors, deleveraging by selling one or more of your properties is one other way of getting ahead of your loans.
On the other hand, for clients who may have extra cash flow, it might be worthwhile making extra repayments and get ahead of your loan (not available for fixed rate loans). By paying down the loan sooner, your interest repayment component would be reduced accordingly.
4. Check when your fixed rate term is expiring
Borrowers who may have their fixed loan splits expiring in the next 6 months are advised to plan ahead and decide whether to let the loan revert to a variable rate or re-fix it (bearing in mind though that fixed rates are not lower than variable rates currently). Your broker or bank would be able to help you with product comparisons as well as negotiating the maximum interest rate concession possible.
For SF Capital clients, this process can be expedited for you, if you are able to supply us with your loan details up front. In any case, please get in touch with your broker or our Client Services Manager, Alexey Gandin <> to assist you further.
5. Review your interest rates
Headline rates are one thing but it is your interest rate discount (or rate “concession”) that determines your end rate. You should check with your bank to ensure you are getting the best bargain possible in terms of your rate discount. The majority of lenders are open to rate negotiations every 6 to 12 months.
If you’re an SF Capital client, please reach out to us with your loan details so that we can re-negotiate your interest rate discount for you. Even if the outcome is small or no change, by running a rate review, at least you know that you are already on the best possible rate discount possible for your facility.
Rate negotiation is a service that is complimentary for SF Capital clients.
6. For buyers, assess the property drivers as part of the investment decision
According to CoreLogic Data, property prices are already falling. Falls are also expected accelerate so factor this in mind when negotiating with vendors. Expect that prices are going to decrease in a rate rise cycle and if you can wait then you could ride it out until prices stabilise.
Having said this, dwelling values are ultimately determined by a combination of micro- and macro- drivers, besides factors specific to the property itself, such as build, features, rental yield, size and location, which can make an individual market move in its own cycle. If you’re in the market to buy a property in the current environment, assess the key investment property drivers as part of your investment decision.
Want to talk to a broker?
We hope this short piece has given you some things to consider for your current lending in a rate rise environment. If you have questions about your existing loan and would like to speak to an SF Capital broker, please do not hesitate to reach out to us.