banks cut borrowing rates but cash rate unknown as yet
Banks and lenders are cutting their rates, but what will happen to the official cash rate tomorrow. Image: Canva.
  • Some lenders have started to cut their rates
  • That is not an indication of what will happen tomorrow
  • Even if held, repayments for some are over 40% of their pre-tax income

Some banks and lenders have started to move their borrowing rates down ahead of the Reserve Bank of Australia’s (RBA) interest rate decision tomorrow, but there is more to the story.

The latest data from financial comparison sites are not looking rosy. Canstar research has found borrowers are likely to be under severe stress even if the RBA continues to hold the interest rate at 3.60%. Meanwhile, Mozo research found that a $600,000 mortgage is likely to see an extra $92 added to monthly payments should the cash rate rise 25 basis points.

Borrowing rates cut

Canstar said 33 lenders on its database have cut the owner-occupied fixed home loan rates in April.

While that’s good news for those shopping around for a better deal, it is not necessarily a sign of what will happen tomorrow.

“The move by NAB and the 32 other lenders on Canstar’s database to cut owner-occupied fixed rates this month suggests variable rate cuts are in the future but gives no guidance on Tuesday’s Reserve Bank decision,” said Canstar’s Group Executive Financial Services, Steve Mickenbecker.

“A more accurate guide to variable home loan rates is the bank bill swap rate and is also closely aligned with the Reserve Bank cash rate. It has only moved down around 0.05% since the start of March.

“The Reserve Bank will take some comfort that the March quarter’s inflation growth has eased but would have to be disappointed that the record pace of rate cuts has not delivered a knockout blow. Nonetheless, the Reserve Bank has signalled its patience, expecting inflation to stay above 3% until 2025.”

Mozo also observed a range of movements this month. Mozo’s banking expert Peter Marshall previously told The Property Tribune, “…we have seen variable rates and discounts changing. We have also seen quite a few cuts in fixed rates, that will mean for some, the ‘fixed rate cliff’ they face won’t be quite as large as it would have been.”

Cash rate rise sits on knife edge

Mickenbecker also noted that there are arguments for both sides of the fence, whether the RBA will hold rates or raise them:

“There is just enough data to suggest the Reserve Bank may continue to keep the cash rate on hold, but also enough data to put us all on notice that another touch or two on the brakes may be necessary at some stage,” said Mickenbecker.

Finder’s survey of 42 experts and economists about the May cash rate similarly found there was not much in it: 19 experts (45%) said they believed the cash rate will hold for a second month at 3.6%, with the remaining 23 (55%) believing the cash rate will rise.

The survey further found that exactly one in two experts are confident the RBA will increase the cash rate by 25 basis points to 3.85% in May, while two experts (5%) believed the rate rise may be 15 basis points.

With a view to the mid-year, 32 experts (76%) believed the RBA will hold the cash rate in June.

Graham Cooke, head of consumer research at Finder, said it was another divided outcome from the panel.

“This month’s result is the tightest we’ve seen since the RBA started hiking the cash rate, highlighting the difficulty of managing inflationary pressures without breaking too many household budgets.

“While it’s anybody’s guess, I think the RBA will likely hold again this month, as there are some indications that the first 10 rate rises are only starting to have an effect. The full impact of the new rates may not be felt until later this year,” Cooke said.

Angela Jackson of Impact Economics and Policy said she was expecting a rate increase.

“The latest inflation figures will provide enough justification for the RBA board to move again on rates, with services inflation, in particular, likely to weigh heavily on their decision.”

However, Shane Oliver from AMP said it was more likely to hold.

“Inflation has now peaked and is falling a bit faster than the RBA expected.

“Although it’s a close call, this bolsters the case – along with increasing evidence of slowing growth and a cooling labour market – for the RBA to leave rates on hold in May ahead of an eventual cut in rates to support struggling economic growth from later this year and through 2024,” Oliver said.

Severe mortgage stress even if rates hold in May

Research by Canstar has found that even if the interest rates stay at 3.6% tomorrow, some may still be seeing red as they spend over 40% of their pre-tax income on repayments.

The company analysed the impact of variable interest rate rises on recent borrowers who purchased a median priced property with a 20% deposit and an income just big enough to afford the loan.

For a house purchased in April 2021 at the median price, Canstar calculated that a borrower is likely to be contributing 38.9% of their before-tax income towards their loan repayments; for an April 2022 purchase, that figure rises to 42.3% of the before-tax income.

It is generally considered ‘mortgage stress’ when repayments exceed 30% of a borrower’s before-tax income.

“Borrowers who jumped into the market with loan repayments up to their income capacity in April 2022 are now spending more than 40% of their income on repayments and are likely to be struggling with normal living costs after paying the mortgage,” said Mickenbecker.

“Those who beat much of the house price boom and bought a year earlier, in April 2021, are only a little better off.”

The analysis also highlighted the issue of ‘eroding equity’, with some buyers having made their purchase at close to the peak of the market.

“The problem with falling equity is that the banks become nervous when borrowers come looking for help with repayment relief, as they too are at risk of potentially having to write the loan off,” said Mickenbecker.

“Fortunately, relief appears to be at hand with early promising signs that house price falls are behind us.”

Unit buyers did not seem to dodge the bullet either, with Canstar analysis finding for an April 2021 purchase, the repayments are likely 37.1% of before-tax income, and an April 2022 purchase is likely around 39.4% of before-tax income.

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