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Data & Insights

Fastest interest rate rises in a generation drive record levels of refinancing

By PEXA Insights • Oct 2022

Today the Reserve Bank of Australia (RBA) announced its sixth consecutive month of rate rises. It raised the cash rate by a further 25 basis points (bp), taking it from 0.1% in April to 2.60%. This large and rapid series of rises is being passed on in full to household mortgage holders on variable terms. As a result, PEXA’s Refinance Index is continuing to show record levels of refinancing nationwide.

PEXA Chief Economist, Julie Toth, said: “This latest cash rate decision takes the total rate rise this year to 250 bp in just six months. This is the largest and fastest rate rise implemented by the RBA since the current policy of inflation targeting commenced in the early 1990s. The speed of these rises – coupled with the relatively lengthy transmission of interest rate rises through the banking system – means that the full impact of this year’s sequence of rate rises has not yet been felt. It will likely set in from around Christmas.

“This month’s rate rise was smaller than markets had expected, but the RBA’s accompanying statement continues to flag further rate rises ahead to tame inflation. Action to slow inflation is warranted but demands caution, since rate rises will also put the brakes on activity and employment more broadly.”

“Looking ahead, October’s inflation data will include rising petrol prices as the fuel excise is reinstated. This will be followed by the impact of fiscal policy measures in the Federal Budget, which is due to be announced in late October. Budget measures that can ease the pressure on housing affordability and household living costs will be most welcome, as we rapidly approach Christmas and the summer holiday season.”

What do today’s interest rate rises mean for mortgagees and home buyers?

Recent research by PEXA Insights found that of Australia’s nearly eight million mortgage holders, an estimated 2.48 million had refinanced their home loan in the past year and/or intended to refinance within the next two years. Reflecting the speed of increases in interest rates in 2022, 71% of mortgage refinancers said they were feeling ‘anxious about rising rates’.

“PEXA’s research indicates that rising interest rates are driving record numbers of mortgagees to refinance their loans, with PEXA’s Refinance Index hovering near its record highs, at 178.9 points (seasonally adjusted) in the week ending 2 October 2022. Our consumer research also confirms the strong appetite for Australians to shop around for the best deal possible – and this is warranted – given consumers can save an estimated $1,524 per year on average.  

“Around 35% of Australian households are owner-occupied with a mortgage (ABS Census 2021). For a typical housing mortgage balance of $500,000, today’s increase of 0.25% will add a further $1,250 in annual interest payments, or $100 per month. Once fully implemented by lenders, the cumulative cash rate increase of 2.50% so far this year will have added around $12,500 in annual interest payments, or $1,040 per month in additional interest payments to a typical loan balance of $500,000.

“Around 31% of households are renting (ABS Census 2021). For renters who aspire to break into home ownership, local house prices might be falling, but their maximum loan size will be significantly smaller. The RBA recently calculated that even before this latest rate rise, the 225 bp increase in interest rates from May to August “will have reduced borrowers’ maximum loan size by around 20% ”.[1] This will inevitably result in fewer people moving from renting to owning, and at lower average price points.

PEXA’s Refinance Index, week ending 2 October:

  •  178.9 points, down just 0.2% from one week earlier (seasonally adjusted)
  • Up by 0.2% from the same week one month earlier and
  • Up by 7.0% from the same week one year earlier.

For more information, visit PEXA Data and Insights.

[1] Jonathan Kearns, Interest Rates and the Property Market, RBA speech to AFR property summit, 19 Sep 2022.

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