RBA slams market with 0.50% August rate hike. How will lenders respond?

Mortgage holders will be bracing for their monthly repayments to push even higher, following the Reserve Bank of Australia’s decision to jack up interest rates by 50 basis points this month.

This is the fourth consecutive month the RBA has lifted the official cash rate , taking it from near zero — where it remained as the country rode out the worst of the pandemic period — to 1.85 per cent.

The decision comes as inflation rose to 6.1 per cent over the June quarter, as revealed by ABS data released last week. On non-discretionary items price rises were higher at 7.6 per cent.

“The Board places a high priority on the return of inflation to the 2–3 per cent range over time, while keeping the economy on an even keel,” RBA governor Philip Lowe said in his post-meeting statement.

“The increase in interest rates over recent months has been required to bring inflation back to target and to create a more sustainable balance of demand and supply in the Australian economy. The Board expects to take further steps in the process of normalising monetary conditions over the months ahead, but it is not on a pre-set path.”

While inflation is causing headaches in Australia, it’s wreaking even greater havoc in other advanced economies. Data from June showed annual inflation picked up to 8.6 per cent in the Eurozone, 9.1 per cent in the US, and 9.4 per cent in the UK.

Last week, the US Federal Reserve lifted its own policy rate by 75 basis points, with Fed chair Jerome Powell leaving the door open to further large rate hikes if price rises persist.

Any moves by the Fed will loom just as large over the RBA as domestic inflation, given the capital outflow and currency depreciation that would result from diverging monetary policies.

“It's not all about mortgages and savers in Australia. It’s also about how competitive Australia is at attracting foreign money,” said Mozo’s banking expert Peter Marshall.

What does this mean for mortgage holders?

In a recent speech, RBA deputy governor Michele Bullock claimed that the majority of households will be able to handle higher repayments, pointing to the $260 billion in savings that Australians had accumulated over the pandemic period.

But surging interest rates will still test borrowers’ limits. Assuming lenders pass on today’s hike to their customers, the average variable rate in our database will jump to 4.60% p.a. (up from 3.07% p.a. at the start of the year).

Marshall says Australians who bought when property prices were at their highest will be most vulnerable, particularly if they’re not in a position to refinance.

“It’s a classic trap of buying late in the cycle, there will be some people who just can’t afford to keep a roof over their heads anymore,” Marshall said.

“That potentially means a lot of rushed property sales, and if that happens when prices are sliding, then the payout is smaller and you’re left with potentially hundreds of thousands of dollars of useless debt.”

Borrowers coming off fixed rate loans will also have to review their budgets, with the RBA estimating that the variable rates they roll over to could see their repayments go up by 40 per cent or more.

For these customers, the key to managing higher repayments won’t be much different than it is for other borrowers.

“If you have an offset account , make good use of it when you can. If you’re paying 4% p.a. on your mortgage, there’s no way you can get a comparable rate on your savings unless you’re looking at a 5-year term deposit,” Marshall said.

“And if you don’t have an offset account, making additional repayments or putting in the legwork and investigating cheaper mortgage options are some of the best things you can do.”

We’ll be keeping track of how banks respond to the RBA’s decision as word comes in. For more information, visit our RBA rate tracker page or our home loan comparison page.