‘The entertainment budget would take a hit’: Homeowners decide which expenses to cut

‘The entertainment budget would take a hit’: Homeowners decide which expenses to cut

Key points

  • A homeowner with a mortgage of half a million dollars faces a $65 rise in monthly repayments.
  • The Reserve Bank’s interest rate increase on Tuesday is likely the first in a string of rises. 
  • As mortgages get more expensive, buyers will likely cut back on discretionary spending. 

Borrowers are set to run the ruler over their discretionary spending after the Reserve Bank on Tuesday kicked off the first round of interest rate rises in a decade.

A homeowner with a mortgage of half a million dollars will face a $65 rise in their monthly repayments, RateCity modelling shows, assuming they pay the average variable rate and their bank passes it on in full.

An owner with a mortgage of $750,000 will see a $98 rise, while repayments on a million-dollar mortgage will rise by $130.

About a million homeowners had never experienced an increase in the cash rate before the central bank hiked it by 25 basis points to 0.35 per cent on Tuesday in a bid to combat high inflation.

Borrowers are bracing for a string of rate rises over coming months, as the RBA flagged an improving economy allowing it to end its crisis-era settings.

Westpac has forecast a cash rate of 2 per cent by May 2023, which would lift monthly repayments by about $511 for someone with a mortgage of $500,000.

The average loan for an owner-occupier in Victoria is more than $624,000, February figures from the Australian Bureau of Statistics show.

Westpac senior economist Matthew Hassan said although most homeowners expect rate rises, the 25 basis point rise from the RBA was a wake-up call and slightly larger than expected.

“We know from our own survey of consumer sentiment that most Australians were expecting rates to move higher over the next year,” he said.

“And over a third were expecting rates to move by more than a percentage point. I think that’s a little underdone and there’s probably not a great appreciation of how quickly and how far rates will need to move.”

He said households have accumulated about $250 billion in savings since the pandemic hit thanks to government stimulus and reduced opportunities to spend. But once the post-lockdown spending normalises, interest rate rises will slow consumer spending.

He also warned that housing markets were at the beginning of a correction, as rate rises affected borrowing capacity for buyers.

Croydon homeowner Bridgitte Vogt said rising interest rates meant she will need to reconsider her spending.

“I’d have to cut back on certain things and look at which expenses I could cut back,” the 36-year-old said.

Melbourne homeowner Bridgitte Vogt is preparing for higher interest rates.Credit:Luis Enrique Ascui

“The entertainment budget I think would have to take a hit.”

The sole parent of one works three jobs, including in retail, as a receptionist and sales representative, as well as a judge of bodybuilding competitions.

She is likely to look at whether she can get a better interest rate on her mortgage, but is happy with her current deal through loans.com.au. She also has a rainy day fund in case interest rates rise to high levels.

“Everything has gone up. I’m lucky I have a pool of money I have put aside just in case,” she said.

“I don’t want to dip into those emergency funds just to pay my mortgage.”

Home borrowers who have had their mortgages for years are better prepared than recent buyers. Many who borrowed when interest rates were higher kept their repayments the same as rates fell.

About 40 per cent of borrowers on variable rates would not have to increase their regular monthly repayments to cope with a 2 percentage point lift in interest rates, Reserve Bank research showed.

But about a quarter of variable-rate borrowers will face a 30 per cent-plus increase in their repayments under this rate rise scenario.

Rising interest rates will put downward pressure on house prices.Credit:Photo: Joe Armao

CoreLogic research director Tim Lawless said this was the first of many interest rate hikes that banks will pass on quickly, if not immediately, and warned borrowers to budget for higher mortgage costs.

“Lenders will be focused on maximising their profits. Anybody who has a mortgage should be expecting that will be passed on by the banks as soon as practical,” Lawless said.

“Anyone who has a debt with a floating rate should be budgeting for interest rates to go well above what they are at the moment.”

The Reserve Bank noted in its meeting minutes that business surveys suggest larger wage increases are now occurring in many businesses.

“That’s the silver lining,” Lawless said.
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