ANZ is the first bank to hike mortgage rates as the RBA hikes interest rates to 3.35 percent

columnist Jennifer Hewett writes that another rate hike will hit mortgage holders already struggling with the rising cost of living – but the alternative is worse:

bang. The Reserve Bank’s decision to hike rates by another 0.25 percent may have been expected, but it comes as another unpleasant shock to mortgage holders struggling to fathom how fast their monthly payments are rising.

A cash rate of 3.35 percent is the highest in a decade, a full 2.25 percent higher than this time last year. With nine straight raises and counts, Philip Lowe’s statement is blunt that the RBA board expects more raises will be needed in the coming months.

The pain is evident in the calculation that since interest rates began to rise last May, it already requires almost another $1,000 a month on a $500,000 mortgage — double what it takes for those on a $1 million mortgage -Mortgage.

The pain is less obvious, but it’s hurtling like a financial freight train at these 800,000 households previously isolated by extraordinarily low fixed interest rates that were prevalent before Lowe realized he had made a big mistake on inflation.

Yes, the US Fed rate is still nearly 1.5 percent higher despite lower US inflation numbers. But unlike the typical 30-year deals in the US fixed-rate mortgage market, the Australian version has a maximum term of two to three years. That means many of these extremely low-yielding fixed-term contracts – often with gigantic Sydney mortgages – are expiring or about to expire.

(Of course, among them are my son and new daughter-in-law who have followed my urging to enter the housing market at the top price. The plunge into what they have to find each month was almost too scary for them — or me — to contemplate. Inside few months there will be no escape from a dramatically changed reality.)

According to the RBA governor’s more politely worded statement, the board recognizes that the full impact of the cumulative rise in interest rates is yet to be felt in mortgage payments.

“There is uncertainty about the timing and magnitude of the expected slowdown in fiscal spending,” he said. “Some households have significant savings buffers, while others suffer painful budget constraints due to higher interest rates and rising living costs. Household balance sheets are also being hit by the drop in property prices.”

But the resilience of the economy has weighed on any optimism that inflation peaked late last year. A relatively high total of 1.9 percent in December meant annual inflation was 7.8 percent last year – the highest since 1990. Even the alternative measure of inflation without temporary or extreme price movements provided no evidence that the RBA’s increases had already shown sufficient effect.

Although retail sales were more subdued in December, there is general confusion as to whether the numbers represent a clear downward trend or more of an adjustment in buying seasons.

The RBA’s explicit reference to further rate hikes this year underscores its determination to “do what is necessary” to restore its inflation-fighting reputation.

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