Borrowers will feel the heat as the RBA hikes rates again, but new customers get cheaper deals

As the Reserve Bank raises interest rates for the fourth time in four months, home loan borrowers brace for more repayment difficulties.

The official interest rate is now at its highest level in six years, at 1.85%, from a record low of 0.1% in early May.

Some economists say the RBA is only halfway through its rate hike cycle, with the goal of reaching or even exceeding 3% by the end of the year.

As the cost of money rises, the big four banks have dramatically raised interest rates for existing customers with variable rate loans, and more rate hikes are expected.

RateCity said bank customers could expect to see an average floating rate of 4.61% if today’s RBA rate hike is fully passed on.

He said the 1.75% cumulative increase in borrowing costs that had occurred since the start of May would add an additional $472 per month to mortgage payments for the typical borrower with a $500,000 loan. $ over 25 years.

Borrowers with a $1 million mortgage would have to pay an extra $944 per month.

RateCity’s estimate of the cost of rising RBA rates on monthly mortgage payments. (RateCity: Provided)

Fixed rates increase

The rates offered for new fixed rate loans are increasing significantly.

It comes as new data from the Australian Bureau of Statistics (ABS) shows the proportion of new home loans taken out at fixed rates has fallen to 9% from the July 2021 peak of 46%.

Sally Tindall, research director at RateCity.com.au, said 90 lenders raised rates on fixed-term home loans last month ahead of this latest increase.

“Fixed rate hikes are coming massively and quickly as the cost of funding continues to put pressure on bank results,” she said.

Financial comparison service Mozo said fixed rates offered by some online lenders had already reached 8%.

As of Tuesday night, no major bank had announced an interest rate hike in response to the RBA’s latest rate hike.

But Macquarie Bank announced a range of different price responses.

It announced that it would increase its variable benchmark rates for home loans by 0.5% from August 12.

It will lower its fixed interest rates for home loans to 0.75% for new and existing variable rate customers who wish to fix their interest rate, starting August 5.

And it will increase the current interest rate on its savings and day-to-day accounts by 0.5%, to 2.25%, on balances up to $250,000.

Refinancing jumps, demand for new loans weakens

As the higher cost of borrowing leads to weaker demand for new home loans, more and more existing borrowers are refinancing to try and get lower interest rates from their banks’ competitors.

Mortgage broker Mortgage Choice said 42% of borrowers who took out home loans in June were refinancing existing debt.

Discounts offered by banks to new borrowers saw refinancing jump 9.7% in June to a record $12.7 billion.

Meanwhile, the value of new loan commitments taken out each month remains near historically high levels, but is clearly declining.

The ABS said the value of mortgage approvals fell 4.4% in June, on a seasonally adjusted basis, as RBA rate hikes dampened appetite for borrowing.

ABS New loan commitments
The value of new loan commitments remains at a historically high level, but is beginning to decline.(Source: Australian Bureau of Statistics)

“The value of new loan commitments to homeowners fell 3.3% in June 2022, while new loan commitments to investors fell 6.3%,” said Katherine Keenan, Chief Financial and wealth at ABS.

“These declines followed increases in May, attributed to a clearing of application processing backlogs by lenders.”

Discounts offered to low-risk borrowers

Research from financial comparison website Canstar shows that nearly one in two lenders offer loans at slightly lower rates to borrowers with large deposits.

It says that for borrowers with a 40% deposit or the equivalent equity in their property, 49% of lenders on its comparison site offer interest rates that are on average 0.21% lower than the rate paid by borrowers with half the deposit. Cut.

Canstar financial analyst Steve Mickenbecker said with the economic outlook becoming more uncertain, lenders were competing more for lower-risk borrowers.

“House prices are expected to fall 10-20%,” he said.

“Lenders are looking for loans where there is a bigger buffer for house price drops and nearly half are rewarding those borrowers with lower interest rate offers,” he said. -he declares.

“After benefiting from strong house price increases over the past two years, borrowers who have been in their homes for several years now own a good share of them.

“There may be a strong case for borrowers in this position to open a negotiation with their lenders for a rate cut,” he said.

At the end of last month, ANZ cut rates on new standard variable mortgages by up to 0.5 percentage points for borrowers with larger deposits.

Ms Tindall told RN Breakfast she was paying for people to shop around, with 10 lenders cutting rates for new customers in the past three months.

“What we know from all the data that comes to us is that new customers, customers willing to switch banks, often get the best deals,” she said.

” Why ? Because banks apply preferential rates to new customers, not to loyal customers. »

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