Here's what the increase to the official cash rate could mean for your mortgage

Wednesday, 17 August 2022

Experts say the latest increase to the official cash rate may have little impact on borrowers.

The Reserve Bank has hiked the official cash rate again, but the increase is unlikely to have much impact on mortgage rates this time, experts say.

The central bank increased the OCR by 50 basis points to 3% on Wednesday as it attempts to rein in inflation.

The OCR determines the rate at which retail banks can borrow money from the Reserve Bank. When the OCR goes up, banks need to charge customers more to remain profitable. When it falls, banks can offer cheaper loans.

John Bolton, founder of mortgage broker Squirrel, said the latest increase shouldn’t be a cause for concern for most homeowners.

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Fixed mortgage rates were unlikely to be affected by the change as OCR movements were already priced into them, he said.

“Banks tend to move ahead of the Reserve Bank, which is being very predictable with its OCR increases, so banks are quite relaxed about it at the moment.”

Floating rates did follow movement in the OCR and were likely to increase almost immediately, Bolton said.

“You would expect to see floating rates go up by 0.5% in the next day or so.”

While the Reserve Bank previously predicted the rate would peak at 3.5%, the consensus now was that it would top out at 4%, he said.

Squirrel chief executive John Bolton says fixed mortgage rates are unlikely to change following Wednesday’s announcement.

“Banks will be basing their rates on that 4% figure, so it’s likely we’re seeing mortgage rates peaking now.”

CoreLogic chief property economist Kelvin Davidson agreed the direct impact on the housing market could be minimal.

As well as the “pricing in” of expected OCR increases, reduced pressure in wholesale offshore funding costs could also cap the pass-through to mortgage rates here.

Banks were also focusing on existing borrowers and keeping market share as the volume of property transactions fell.

“This will also be playing a role in putting the brakes on mortgage rate increases, and in fact the outright cuts in borrowing costs that we’ve seen in recent weeks.”

However, the housing market still faced challenges. In some parts of the market, recent buyers with a 20% deposit could have seen falls in property values erode most or all of their equity – on paper at least, Davidson said.

“We estimate that nationally as many as 500 first-home borrowers who bought near the peak of the market could now be in that negative equity situation.

“Of course, with unemployment low, provided that they don’t need to sell, negative equity on paper needn’t be a disaster.”

There was also the fact that, even if mortgage rates were at a peak, they had already risen significantly and that had reduced the maximum loan size for new buyers, he said.

“New investors may also be finding it harder to make the sums stack up, in a world where rental yields are still low and rental growth is slowing, and financing costs are much higher.

“There’s probably a limit to how long they’re prepared to ‘top up’ a property while they wait for renewed capital gains.”