All Topics / General Property / How does an increase in the RBA's cash rate help?

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  • Benny
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    @benny
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    Hi all,

    I can’t for the life of me see HOW adding ANY increase to the current cash rate will help anything.  Like, I know we are at an “emergency rate level”, but then, with Covid, Ukraine, petrol costs, and rental/housing costs all doing their thing, they are increasing our costs of living DESPITE anything Australia can do (well, maybe Australia can help with the housing bit – but it won’t happen overnight, and adding to the cash rate won’t do it).  So just HOW does an increase right now help anything?    Sure our economy is doing better than many – perhaps THAT is reason enough to come off the 0.1% setting.

    But as our living costs increase, how does adding MORE cost via a mortgage help with anything?   Add to that (from an earlier post) that our non-discretionary costs are increasing faster than our discretionary ones.   Hmm, a mortgage sounds pretty non-discretionary to me !!   So let’s add to THAT and crank up the pain level even further – like, that’ll help ?????  HOW?  Push people out of homes into a rental market that can’t cope?  Top idea that !!  NOT !!

    And some talking heads are saying “With more cash rate rises to come over the next 6 months”….   I just shake my head – I can’t see HOW any Govt could sit by and watch as more folk go into mortgage stress.  It all just sounds wrong to me right now.

    Hopefully Steve will have some answers on Thursday evening as the Deal Club kicks off.  Can’t wait – maybe his cool head can help my concerns !!

    Benny

     

    Profile photo of Steve McKnightSteve McKnight
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    @stevemcknight
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    The answer is inflation Benny.

    All the cheap money is enticing people to spend, which is causing prices to rise. So too though are supply chain issues that aren’t related to consumption though.

    The argument is that by taking money out of people’s pockets by causing them to spend more on interest it leaves them less to spend on other things, and so that relieves pressure on prices, because demand is diminished.

    It’s a big political statement though to increase by 25bp, higher than the 15bp expected. I was expecting no change this month, but a change next month, as wage price data is not released until later this week, and the RBA could have sat pat with good reason, and not dropped an anvil on SocMo’s head.

    It’s not panic stations though, as we are coming off the lowest cash rate ever, but, it is also true to say that there has been a 250% increase off the base rate (.1 to .35). I think that will hurt some people who are already struggling.

    Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
    https://www.propertyinvesting.com

    Success comes from doing things differently

    Benny
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    @benny
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    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

    Profile photo of sandhyasandhya
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    Hi Benny,

    Perhaps my question is naive, may I pls ask how you got this: “For the person with the average mortgage of (say) 2.5%, that is a 10% increase right off the bat.”?

    PS: Figured it out, could not delete the post, so here’s the PS.

     

     

    • This reply was modified 3 months, 1 week ago by Profile photo of sandhya sandhya.
    Benny
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    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

    Profile photo of sandhyasandhya
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    Thanks Benny. Much appreciate you starting and elaborating on the discussion.

    Benny
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    @benny
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    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

    Benny
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    Wow !!  There must be more to this – is the RBA deaf, dumb, and blind?   First, let’s take an early comment from back a few posts:-

    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”?

    OK, so since THAT time, there have been two more increases (and what increases!)  The second increase was 0.5% as was the third.  So suddenly, from a 0.1% cash rate, we are now at a 1.35% cash rate.   OK, that affects banks and THEIR transfer of money.  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?

    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 when property is already becoming shakey as buyers desert the market?

    Yeah, I know, that 0.1% Cash Rate always was an “Emergency Setting” – yet there appeared to be no move made last year to increase it as our employment rate dropped to its lowest level in years, and, even today, businesses are still struggling to find workers.   Wasn’t that a sign of recovery back then?  And didn’t house prices start increasing then too?   Wouldn’t it have been smart to tap the brakes back then?

    What took the RBA so long to get off that “emergency setting”?   Why does it now (as prices of food, petrol, rents, etc all go through the roof) decide to add to the pain with three increases in a row, and maybe yet a fourth to come in early August?

    To me, this all sounds a little “too much, but too late” from the RBA.  Can we vote in another RBA group please !!

    Benny

    Benny
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    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

    Benny
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    @benny
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    And, sure enough, a further 50 basis points (or 0.50%) added just days ago.  I do hope the new Govt takes the time to give the RBA a bloody good talking-to !!!   They sure can do with it.

    We are well on the way to that 150% increase.  Where are we right now then?   A total 175 basis points (or 70% – see below) so far.

    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.

    Using that same starting rate of 2.5% interest once more, where are we now, with the RBA having added 1.75% in just 4 months (and the banks dutifully passing it on to all borrowers….)    Isn’t that a 70% lift already?    Who can handle that, even as petrol, food, transport, and utilities climb into the stratosphere too?

    Hey, RBA, stop and smell the roses !!!  This is ridiculous – and dangerous.

    As this began, the warning signs were already there – check out the first post of this whole topic :-

    https://www.propertyinvesting.com/topic/5083103-how-does-an-increase-in-the-rbas-cash-rate-help/#post-5083103

    Don’t all those things still apply today, and since then, mortgage interest has jumped by 60% for many borrowers?  Isn’t that alarming?   Time for the Govt to step in – with an axe perhaps…..

    Benny

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