Mortgage holders brace for hundreds more in repayments
As lenders prepare for the Federal Reserve to raise interest rates, borrowers are running out of time to keep the mortgage rate below five percent.
As the RBA rate-setting board begins its first two-day meeting of the year, the majority of economists and money markets expect the central bank to increase the cash rate to 3.85 percent, to be announced on Tuesday.
Sally Tindall, director of data analytics at financial comparison site Canstar, said this would result in mortgage rates below five per cent disappearing.
The revival in inflation since the last interest rate cut in August has caused a dramatic turnaround in market expectations.
After two more rate cuts were priced in, traders are now betting on two rate hikes by the end of 2026.
Lenders have followed suit with at least one 60% increase in fixed interest rates since the last RBA meeting in December, Canstar rate tracker shows.
“There are currently only six lenders offering fixed interest rates below five per cent,” Ms Tindall said.
“An increase in February will almost certainly close the door on the last remaining options.”
A 25 basis point rate increase would add $150 in monthly repayments to a $1 million mortgage, or $1,800 a year assuming it is transferred entirely by banks.
But Westpac chief economist Luci Ellis said the increase was not fully guaranteed.
While the former RBA deputy governor expects the central bank to raise interest rates, there is a possibility the board may choose to wait a little longer.
He said there was evidence that the data showed inflation was not moving further from target, and there were also arguments for caution given that the Australian Bureau of Statistics’ new monthly measure made inflation difficult to interpret.
However, HSBC chief economist Paul Bloxham says there is a strong case for a rate hike.
“By not rising this much and not having this big of a downturn, it looks like the RBA should keep cash rates higher for some time,” he said in a research note.
He said the RBA cut interest rates too soon and too much because of two wrong assumptions.
First, the RBA assumed that Australia could sustain a higher growth rate without contributing to inflation because the productivity growth assumption was overly optimistic.
Secondly, the RBA had too much confidence in Treasury forecasts and was caught off guard when government spending rose well above forecasts.
The government’s mid-year financial update in December showed the biggest upward surprise in spending in decades; public spending over four years was expected to be 1.7 percent higher than GDP forecast in April; This was a “macroeconomically significant” positive surprise.
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