More pain for mortgage holders as RBA announces another rate rise

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.”