More pain for mortgage holders as RBA announces another rate rise
Governor Michele Bullock said the 0.25 percent increase was ‘warranted’ to battle persistent inflation levels
Governor Michele Bullock said the 0.25 percent increase was ‘warranted’ to battle persistent inflation levels
After months of speculation, the Reserve Bank has raised the cash rate by 25 basis points at a meeting of the board this afternoon, bringing the interest up to 4.35 percent. It marks the first increase since Michele Bullock took on the role of RBA Governor in September but was widely expected, with all four of the major banks predicting the rise.
Pointing to the increasing costs of services, which has resulted in a rate of inflation that is proving hard to draw down, the board said today that the target of 3.5 percent level of inflation was not likely to be achieved until the end of next year.
“Inflation in Australia has passed its peak but is still too high and is proving more persistent than expected a few months ago,” Ms Bullock said in a statement. “The latest reading on CPI inflation indicates that while goods price inflation has eased further, the prices of many services are continuing to rise briskly. While the central forecast is for CPI inflation to continue to decline, progress looks to be slower than earlier expected. “The Board judged an increase in interest rates was warranted today to be more assured that inflation would return to target in a reasonable timeframe.”
While today’s decision would not be welcomed by mortgage holders, CoreLogic research director Tim Lawless said it would likely take some of the heat out of the housing market where prices have continued to their upward trajectory.
“Another 25 basis points translates, roughly, to another $80 per month in mortgage repayments on a $500k loan on top of the $1,040 monthly increase already seen since rates started to rise in May last year,” he said. “Higher interest rates also imply a further diminishing in borrowing capacity as lenders continue to assess borrowers using a three-percentage point serviceability buffer.”
While global events such as the Israel-Gaza conflict were beyond the control of Australian markets, he said it was important to avoid high inflation becoming entrenched.
However, Zippy Financial director and principal broker Louisa Sanghera said the board’s decision did not make sense given many mortgage holders were already stretched to the limit following a 4 percent rise in rates since May last year.
“Many of the new or existing borrowers we speak with have absolutely no chance of refinancing, with a lot of them technically not servicing their current debt levels,” she said.
“Over the past two months in particular, borrowers are becoming more desperate with many homeowners turning to interest-only repayments as the only way they can continue to hold on to their homes.
“Unfortunately, their current lenders don’t necessarily offer interest only to owner occupiers – and they can’t refinance – so they may need to sell or opt for a repayment pause to keep the roof over their heads.”
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New research suggests spending 40 percent of household income on loan repayments is the new normal
Requiring more than 30 percent of household income to service a home loan has long been considered the benchmark for ‘housing stress’. Yet research shows it is becoming the new normal. The 2024 ANZ CoreLogic Housing Affordability Report reveals home loans on only 17 percent of homes are ‘serviceable’ if serviceability is limited to 30 percent of the median national household income.
Based on 40 percent of household income, just 37 percent of properties would be serviceable on a mortgage covering 80 percent of the purchase price. ANZ CoreLogic suggest 40 may be the new 30 when it comes to home loan serviceability. “Looking ahead, there is little prospect for the mortgage serviceability indicator to move back into the 30 percent range any time soon,” says the report.
“This is because the cash rate is not expected to be cut until late 2024, and home values have continued to rise, even amid relatively high interest rate settings.” ANZ CoreLogic estimate that home loan rates would have to fall to about 4.7 percent to bring serviceability under 40 percent.
CoreLogic has broken down the actual household income required to service a home loan on a 6.27 percent interest rate for an 80 percent loan based on current median house and unit values in each capital city. As expected, affordability is worst in the most expensive property market, Sydney.
Sydney
Sydney’s median house price is $1,414,229 and the median unit price is $839,344.
Based on 40 percent serviceability, households need a total income of $211,456 to afford a home loan for a house and $125,499 for a unit. The city’s actual median household income is $120,554.
Melbourne
Melbourne’s median house price is $935,049 and the median apartment price is $612,906.
Based on 40 percent serviceability, households need a total income of $139,809 to afford a home loan for a house and $91,642 for a unit. The city’s actual median household income is $110,324.
Brisbane
Brisbane’s median house price is $909,988 and the median unit price is $587,793.
Based on 40 percent serviceability, households need a total income of $136,062 to afford a home loan for a house and $87,887 for a unit. The city’s actual median household income is $107,243.
Adelaide
Adelaide’s median house price is $785,971 and the median apartment price is $504,799.
Based on 40 percent serviceability, households need a total income of $117,519 to afford a home loan for a house and $75,478 for a unit. The city’s actual median household income is $89,806.
Perth
Perth’s median house price is $735,276 and the median unit price is $495,360.
Based on 40 percent serviceability, households need a total income of $109,939 to afford a home loan for a house and $74,066 for a unit. The city’s actual median household income is $108,057.
Hobart
Hobart’s median house price is $692,951 and the median apartment price is $522,258.
Based on 40 percent serviceability, households need a total income of $103,610 to afford a home loan for a house and $78,088 for a unit. The city’s actual median household income is $89,515.
Darwin
Darwin’s median house price is $573,498 and the median unit price is $367,716.
Based on 40 percent serviceability, households need a total income of $85,750 to afford a home loan for a house and $54,981 for a unit. The city’s actual median household income is $126,193.
Canberra
Canberra’s median house price is $964,136 and the median apartment price is $585,057.
Based on 40 percent serviceability, households need a total income of $144,158 to afford a home loan for a house and $87,478 for a unit. The city’s actual median household income is $137,760.
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