Reserve Bank of Australia (RBA) has raised the cash rate by 0.25%

At its meeting today, the Board decided to increase the cash rate target by 25 basis points to 35 basis points. It also increased the interest rate on Exchange Settlement balances from zero per cent to 25 basis points.

The RBA Board believes now is the right time for the Government to begin withdrawing some of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic. The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected. The headline inflation increased to 5.1% in the March quarter, coupled with the labour markets continuing improvement with the unemployment rate declining to 4.00% with labour force participation increasing to record highs. There is also evidence that wage growth is picking up. Given this, and the very low level of interest rates, the RBA believes it is appropriate to start the process of normalising monetary conditions.

So how does the interest rate rise affect you?

The impact this decision will have on your individual situation will very much depend on your bank and their decision surrounding their rate rise. Fintor is confident that most banks will raise their rates by at least 0.25%, but there is every possibility for banks to increase by a further amount.

The average Australian mortgage

The ABS data shows a total of 28,373 new loan commitments were issued in February 2022 for people buying a home to live in, not including loans for land or alterations, at a total value of about $16.9 billion. That’s a decrease in the number of new loan commitments of 2.5% from the previous month.

The average new loan in Australia for people buying an existing property was $611,524 in February 2022, down 3.8% from the month before but up 17.3% on February 2021.

The average figure for a loan for buying a newly built home was $562,851, down 6.7% on the previous month, and $516,965 for a loan to build a new home, down 0.1%.

Across the nation, the Northern Territory had the lowest average home loan size in February for an existing home, at just $404,624. The highest was New South Wales at $790,582.

The average home loan for a newly built home was the lowest in the Northern Territory at $308,333 (based on just 12 properties) and the highest in New South Wales at $665,029.

The average home loan for new construction was the lowest in Tasmania at $396,296, while the highest was in the ACT at $651,724.

What is the impact of the average loan of $611,524 for an existing property?

This will depend on what your bank’s decision around their rate rise will be, assuming your bank raises the interest rate by 0.25% to match the RBA, you can expect to pay $127.40 per month or $1,528.80 per annum in additional interest repayments.

What are the potential property market implications?

Fintor believes that the property market will see a period of cooling over the next 2-3 months, however, this will depend on future anticipated rate rises. The impact of the latest rate rise of 0.25% will not cause a major correction, however, future rate rises could. Fintor can’t see the demand for property changing so from this aspect the property market is safeguarded. However, people’s ability to service/ afford the level of loans (debt) that was previously on offer from most banks, will definitely be reduced and we think this will ultimately reduce people’s capacity to purchase properties at the present growth rate. As such, it is our belief that Australians should expect property price growth to stagnate.

However, should the RBA decide to increase the interest rate again, as predicted, Australians should expect the value of property to reduce. To what extent, no one knows!

Fintor’s Mortgage broking specialists have conducted some basic analysis which is based on the median house price in each state, a loan value that assumes a 20% deposit and the impacts of a total interest rate rise of 0.50%. The analysis shows the impact on the average monthly repayment and the increase in repayments over the life of the loan. It is important to understand that rates are likely to increase more than 0.50% over the next 12 -18 months and will vary significantly over a 30-year loan term.

How Fintor’s team can help!

Fintor has a team of both Mortgage broking specialists & financial planners who are able to advise you on the following solutions:

  1. Tax minimisation strategies that allow you to increase your home loan repayments
  2. Strategies to convert non-deductible debt to tax-deductible debt.
  3. Refinance solutions to structure your mortgage effectively and reduce your interest rate
  4. Other comprehensive solutions which can significantly improve your ability to repay your debt quickly

To discuss your particular circumstances in further detail and to explore the strategies and opportunities Fintor can use to help you reduce your loan quickly, please contact us.

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