After a year of pain for borrowers, many Australians have anxiously entered 2023 with the prospect of further cash rate hikes threatening already thin household budgets.
Since interest rates began to rise in May last year, the average borrower with a $500,000 mortgage has seen their monthly mortgage repayments rise by $834. For the average borrower with a $1 million mortgage, monthly repayments are an extra $1668. Add inflation and soaring costs to that mix, and you have many Australian families under a great deal of financial stress.
As of January, the cash rate target currently sits at 3.10%, the highest it has been in over a decade. Whilst the RBA spared mortgage holders from another increase this month, there is still a consensus among the big four banks that further hikes are on the way.
In this article, we’ll explore where interest rates are likely to go in 2023 and what this will mean for your mortgage.
So, where does the RBA take the cash rate from here?
The most likely answer is that it will get worst before it gets better.
The big four banks have each released cash rate forecasts and - while there are differing opinions over the extent - they all expect rates to rise over the next few months.
The big four bank’s cash rate forecasts:
- CBA: 3.35% by February 2023, then falling to 2.85% by November 2023
- Westpac: 3.85% by May 2023, then slowly falling to 2.85% by November 2024
- NAB: 3.60% by March 2023, remaining steady into 2024
- ANZ: 3.85% by May 2023, then easing to 3.60% by November 2024
CommBank’s forecast is the most optimistic, predicting the cash rate to peak at 3.35% early this year before dropping to 2.85% by November. The head of Australian economics at Commbank, Gareth Aird, believes the RBA has only one more rate hike in store for 2023.
"We think we are near the end of the RBA's tightening cycle and expect one further rate hike in Q1 23 that will take the cash rate to 3.35 per cent," Aird said. "From there, we have the RBA on hold as much slower growth in demand is expected to see inflation come down in 2023.
"Our central scenario sees the RBA pull off a soft landing, and we expect below-trend growth in 2023 rather than a recession.”
Forecasts from the other big banks are less encouraging.
ANZ expects there are a few more rate hikes to come, peaking at 3.85% in May before remaining steady. In December, the head of Australian economics at ANZ, David Plank, offered a sobering assessment for mortgage holders going into 2023.
“We see nothing in the RBA’s (December) statement that challenges our expectation that the cash rate target will rise to 3.85 per cent by May 2023,” Plank stated. “While each move from here will be data dependent, we think the key numbers such as [inflation] and wages will leave the RBA with little option but to tighten further.”
Meanwhile, although the RBA remains coy, Governor Phillip Lowe offered some insights for borrowers in his last monetary statement.
"The Board expects to increase interest rates further over the period ahead, but it is not on a pre-set course," Governor Philip Lowe said. "It is closely monitoring the global economy, household spending and wage and price-setting behaviour.
"The size and timing of future interest rate increases will continue to be determined by the incoming data and the Board's assessment of the outlook for inflation and the labour market.”
So what’s the final verdict? Ultimately, it appears we can expect interest rates to climb 0.25-0.75% further by May, before subdued inflation figures will likely begin easing rates toward the end of the year.
What will this mean for my mortgage repayments?
Of course, higher interest rates will mean larger monthly mortgage repayments.
If you want to calculate how rate rises might affect your own mortgage repayments, you can use the mortgage repayment calculator from moneysmart.gov.au.
For a borrower with a 30-year, $500,000 home loan, a rate hike of 0.25% will add around $77 in monthly mortgage repayments. If rates rise by 0.75%, this would instead mean an extra $234 in monthly repayments.
For a borrower with a 30-year, $1 million home loan, a 0.25% rise would mean an extra $154 each month, whilst 0.75% would add $468 to their monthly mortgage costs.
If you’re struggling to keep up with rising interest rates, refinancing your home loan can be a great way to limit your interest costs and ease financial pressure. You can also check out our article on other great ways to manage your mortgage costs when rates are rising.
We also strongly recommend reaching out to a mortgage broker or other trusted professional to help you prepare for further rate hikes. Our finance team at Elephant Advisory will not only be able to help you find lower rates for your home loan, but they can help you prepare an effective budget and savings strategy to help you stay on top of your repayments.