How does an increase in the RBA's cash rate help?

Thanks Steve.  Good comment about “dropping an anvil on ScoMo’s head.  So true !!!    That will give Labor lots more ammunition for the next 3 weeks.

And yes – a 250% increase.   Well caught.   For the person with the average mortgage of (say) 2.5%, that is a 10% increase right off the bat.  Why so big so quickly?   While we have a housing problem, a 10% increase could lead to even more rental anguish.   A $400wk rental might now be $440.  And what about the “6 rises before year end”?

Gee, I hope the RBA read the tea leaves before doing too much more…    What would 6 x 0.25% rises equate to by year end?  1.5% on 2.5% is a 60% increase.  With over 40% of householders already in mortgage stress, this has the potential to rip the hearts out of the average Aussie.

Yes, of course,  that 10% (or 60%) increase is accurate for those with IO mortgages, but in reality the % lift is a lot less for P&I loans.   Still could be half that though – and a 30% increase by year’s end is still quite significant.   Time for RBA attendees to have cold showers ahead of each months’ meeting methinks !!!

Benny

Hi Sandhya,

Sorry, my comment was a bit terse.  Good to know you worked it out.  For others who were wondering, let me add a bit more around that calculation :-

For the person with the average mortgage of (say) 2.5%, that is a 10% increase right off the bat.

A 0.25% increase against a 2.5% mortgage interest rate is a 10% lift.   That is actually correct for anyone with an IO (Interest Only) mortgage.  For those with a P&I (paying both Principal and Interest) mortgage, the % uplift will be lower.  That is because the uplift is measured against a larger $ amount.

As a quick example, someone paying a $400k Interest Only mortgage at 2.5% will be paying $833.33/mth.  After this uplift (assuming YOUR bank passes on that 0.25% lift) the repayments will be $916.67 (or an extra $83.33 per month – a straight 10% lift in costs).

For someone with a P&I (paying both Principal and Interest) loan, the actual monthly cost will be nearer $1600 per month – and the 0.25% rise in Interest (adding $83.33 to their repayments) will be an uplift of 83/1600 or just 5.2%.

Benny

RBA:  Here they go again.  A 0.50% increase this time, after a 0.25% first up.   So, double what I said last time.

But hey there are a few schools of thought here.  The RBA have been jawboning for months about “needing to have 6 rises of cash rate by end of year” or some similar rhetoric.   Now, by going hard right off the bat, some analysts say they may not have to go so hard in future as these two increases are likely to take the heat out of the average family’s spending and having them tend to save more (to cover future house payments?) rather than buying stuff.

Then again, if the RBA did continue to go hard, I can just see tens of thousands of Aussie families in mortgage distress in a time where inflation is hammering them for food, utilities and petrol – and the increased mortgage interest is one extra increase they DON’T need right now.

Hopefully that idea of “6 rate rises” will turn out to be the threatened stick that doesn’t have to be used after all.   Time will tell….

Benny

I just caught a headline on TV that indicates the RBA is considering a 50 basis points rise for EACH MONTH up to year end.

Please say it isn’t so….

I bloody hope NOT !!!   That would be a further 2.5% uplift on the 1.25% already foisted on us.  And let’s check the figures from my last post re the likely effects of such a braindead move:-

But let’s take a look at the mortgagor – the poor old Mum and Dad who were on a 2.5% Interest Rate for their mortgage.

That 1.25% lift is a FIFTY percent increase in the Interest cost of their mortgage, with (it seems) more yet to come?   Who can handle a 50% increase?

If true, this prospective 2.5% lift by year end will totally cruel the Mums and Dads.  Forget a 50% rise in the Interest costs of a mortgage – try 150% !!

Landlords will often have IO loans – in effect, their mortgage costs will be affected in direct proportion to the RBA’s lift.  Let’s take a realistic mortgage amount and what would have been their IO payment each month.   A mortgage of $400k is not out of the question – if on a 2.5% IO interest rate, that is a cost of $10k pa or  $833 pm on that mortgage.     So far, the RBA has lifted that rate by 50% (see quote above).  So now $15k pa or $1250 pm (about $100 a week extra that needs to come from somewhere).

By year end, that landlord might well be paying $25k pa or $2083.33 pm – from $833 to $2083.  What needs to happen to the rents he receives to offset THAT hulking rate increase?  That is now a $300 a week increase in his costs !!!!!!!!   You think we have a rental crisis now?  Just wait till year end !!!!

All I can say is that the new Treasurer’s RBA Review can’t come soon enough.  I am hearing little good news re the RBA at all.

Benny

Well, same same….  The RBA does it yet again.   No “wait to see the effect”.

Qualifying Rate – I heard they stepped from 2% to 3% some months ago.  And folks couldn’t get a loan unless they could handle a 3% lift in Interest on a mortgage.  OK, fair enough, but then what of the FACTS that it hasn’t JUST been mortgage costs that have been increasing lately?   Hasn’t petrol increased by something like 50%?   Food costs?  Energy costs?   For the person who WAS able to qualify recently, how much buffer does the 3% qualifying rate really provide when all these other non-discretionary costs are being stretched along with the mortgage Interest Rate?

After today, the RBA cash rate is 2.35% and the average mortgage Interest Rate will soon be 90% higher than it was just 6 months ago.

How many folks are going to be able to handle that?  How many were already stretching to buy a property in latter days, then found their new purchase has LOST value, even as their mortgage increases?   More importantly, when did the RBA get taken over by forces who are more interested in bringing our citizens to their knees?   Will the current RBA ever get back into the mode of “touching the brakes” then sitting back to see its effect before touching them again?  Or are we SO out of control that the only way is to keep on applying those brakes.  If that was what was happening, surely they would’ve been better to do this in one 2% Chunk rather than pretending that “It’s just a little bit more” five times already.

If I ever had any faith in the RBA before, they’ve lost me now !!!

Benny

November, and the RBA, with yet another 0.25% lift, does the “same old, same old” – well not really !!

The “same old” used to be “Lift rates a couple of months in a row, then sit back and contemplate their navels to see the effect of their actions”.  But not these days.   Now it is squeeze the life out of everything by increasing Interest Rates (a major non-discretionary item in many folks’ budgets) while other non-discretionary items have already jumped hugely.

Power increases and petrol/diesel costs have already had a major effect on stores and their products – e.g. food (a pretty useful non-discretionary item, that one), not to mention basic household costs too.  So let’s add to the pain by continuing to bump the Cash Rate !!

Who is really controlling the ship, and why are they steering it onto the rocks?

It’s got me bluffed !!

Benny

OK, here we are at year’s end, with no more RBA intervention until early Feb 2023.   In the last 3 months of 2022 they “went easy”on us, with just 0.25% each month.   The total uplift from April 2022 (when the Cash Rate was 0.1%) has been a further 3%.

Sounds innocuous, doesn’t it?  A bit like the Interest Rate you “might” be able to get on your Savings in a bank.  But is it really just 3%?

No bloody way.  This 3% has been an enormous blow to many.  Let’s take an example – back in July, it looked like an extra 2.5% increase could happen (after already lifting by 1.25%, giving a year end likely total of 3.75%) :-

But let’s take a look at the mortgagor – the poor old Mum and Dad who were on a 2.5% Interest Rate for their mortgage.

That 1.25% lift is a FIFTY percent increase in the Interest cost of their mortgage, with (it seems) more yet to come?   Who can handle a 50% increase?  If true, this prospective 2.5% lift by year end will totally cruel the Mums and Dads.  Forget a 50% rise in the Interest costs of a mortgage – try 150% !!

With hindsight, we now know the total change was 3%, not the 3.75% that was projected in July – whew !!!   But it still has a huge effect.  That couple who were on 2.5% Interest with their mortgage at the beginning of 2022 will now be facing a 5.5% Interest Rate. And the increase since April was not 150% after all, but it still made 120%.  5.5 / 2.5 * 100 = 220% – i.e. a 120% increase on “what was before”.

120% sounds a helluva lot more than 3%, don’t you think?   And the effect on a mortgage is seriously serious.

The Interest component has more than doubled in just 8 months.   How does a landlord go with attempting to lift rents by 120%?   How do families facing petrol, power, food, insurance and mortgage increases cope?   How many have dropped into “mortgage stress”?   Would have to be a bunch, wouldn’t there?

All I can do is hope (as someone else had commented) that the RBA realise in the New Year that “they went too far”and decide to drop things back somewhat.  I know, I know – the Interest Rate was on an emergency setting – it HAD to lift.  But then prices had ballooned upward, and a 100% lift in Interest on a $1m nortgage is a lot more hurtful than a 100% lift in Interest on a $250k mortgage.

Did the Rate need to lift THAT far, THAT FAST????   I still say No – let’s hope the RBA enjoys their vacation time and relaxes a lot more into the New Year and have the IR’s relax a bit too.

Benny

Well, well, well !!   Out of interest, I went searching for a history of house prices over time in Australia.   The article also compared wages vs cost of housing, taking into account inflation and prevailing interest rates.  The data went from 1970 to 2020.   The results were (to me at least) a little surprising.  One take-away from the article was this one (remember, this was 2020, not today) :-

It’s interesting to note that, although in all cases things are significantly less affordable than they were in 1970, in most cases we’re not actually at peak un-affordability when it comes to servicing a mortgage. Although house prices in all cities are at or near historical highs, interest rates are at all time lows. For Sydney, peak mortgage pain came in 1990 when average home loan rates peaked at about 17% and you were paying $4400 / month in 2020 dollars towards your mortgage.

I say, with a 120% rise in Mortgage interest costs over the last 8 months or so, there has to be a heap of people in mortgage pain right now. Does it equal 1990? I don’t know, but it wouldn’t surprise me if it did. We will have reliable figures in a year or so, and can perhaps look back then to confirm.

The article also went on to say that, once Interest rates got off the ground once more, the findings could change markedly:-

Even though house prices are at or near all time highs, in pretty much all cities, mortgage payments are NOT at record highs. The reason is that interest rates are unprecedentedly low. If house prices continue to grow, or interest rates go up again, mortgage payments are likely to become unsustainable, particularly in Sydney.

and then this:-

Let’s hope interest rates stay at record lows – with today’s house prices, it’ll only take a relatively modest increase in interest rates for mortgage payments to become completely crippling.

On here, we were aware of this likelihood – thanks to Steve, a year or more back, with his updates and warnings.  For others though, following projections of “no increase in Cash Rate until 2024” from the RBA, a lot of folks have been blindsided.  Good luck to them as they endeavour to keep going…..

For those interested, here is the link to the whole article :-

https://www.savings.com.au/home-loans/australian-house-prices-over-the-last-50-years-a-retrospective

Benny

Well, well, well – on the news last night, I hear some are calling for Phillip Lowe’s resignation.  I can’t say I blame them.  With yet another 0.25% (wait up, that is really 10% – see earlier posts) increase, the pain just gets more and more intolerable for many.   Let’s revisit an earlier statement from this topic:-

What ever happened to the RBA of old who would make a couple of changes, then sit back to read the tea leaves and see what effect the changes had rather than slamming down harder on the brakes.

Seems like that (somewhat sensible) ‘old’ RBA doesn’t exist any longer.   Is that Mr Lowe’s fault?  I don’t know, but SOMEBODY in the RBA should be saying “Hey, wait a minute – let’s think about this a bit more…..”    Shouldn’t they?   Shouldn’t Jim Chalmers be having a chat re what is going on?   And what happened to his earlier words re “Initiating a review of the RBA” or was that just a throwaway line from an inexperienced Treasurer?

Surely “It’s time” for some action before the RBA drives our economy further into the ground.  And re their mantra about keeping inflation in a 2 – 3% band?  Who says that’s a good idea to push for that RIGHT NOW?   Long term, yes, but hey, with the cost of near EVERYTHING going up, and folks now struggling to pay a mortgage that has ballooned out over a 9 month period, do we really want to create more unemployment just so the RBA can get inflation down into that magic band?

See, think on it – by taking funds out of the average person’s pocket, they cut back on spending, thus adding to the woes of small business owners who may be running a restaurant, so they sack staff too (and their mortgage – or their landlord’s – has also risen in cost, so they are making less from Joe Public, while also facing increasing costs).   Talk about a vicious circle – and much of it being of the RBA’s making.

What’s the time, Albo?  Time to line up the RBA board and have a wee chat – for all of our sakes.  And bring a few attack dogs with you.  This has all got way beyond a joke.

Benny