Homeowners will face higher interest rates after the Reserve Bank hiked the official cash rate by 50 basis points yesterday – the biggest hike in 22 years.  

The latest move takes the overnight cash rate to 0.85% after the RBA’s 25 basis point increase last month.  

The latest rate rises are likely to increase the average variable interest rate for a new owner occupier loan to around 3.16%, according to CoreLogic.  

Variable mortgage holders are likely to pay about $200 per month in additional repayments on a $500,000 mortgage, compared with mortgage rates in April. 

“With underlying inflation moving sharply higher to be up 3.5% over the year, the RBA’s heavy lifting on the cash rate still has some way to go, with interest rates likely to consistently rise through the second half of the year and into 2023,” CoreLogic Research Director Tim Lawless said.  

“While higher interest rates will lower borrowing capacity, less household savings and tighter balance sheets will also weigh on serviceability assessments for prospective borrowers, adding to diminished demand for home purchases.     

“For housing markets, higher mortgage rates add further downside risk to values, which are already trending lower, such as the case in Sydney and Melbourne, or losing steam in the rate of growth across most other markets.   

“Importantly, home values were already easing well ahead of a rising cash rate. A combination of higher fixed mortgage rates, lower consumer sentiment, tighter credit conditions and worsening affordability have all played a role in the slowdown to-date.” 

CoreLogic found that settled sales estimates indicated dwelling sales over the three months to the end of May were -19% lower than at the same time a year ago, with a similar trend seen in home lending data from the ABS, where the number of new mortgage commitments was also trending lower.  

Lawless said a stronger economy, along with the tightest labour market conditions in a generation, should help to ensure the ensuing housing downturn remained orderly.   

“While we expect the housing downturn evident in Sydney and Melbourne will gradually spread to other regions, the trajectory for this will depend on how fast and how high interest rates move and normalise, along with the performance of the broader Australian economy and labour market,” he said.  

Canstar finance expert Steve Mickenbecker said the RBA was convinced there would be broad-based wage increases and that more sizable rate rises were needed to dampen demand and take the heat out of inflation. 

“The property market is already showing signs of softening, with prices slightly down and new lending volumes falling,” Mickenbecker said.   

“Further rate increases will confirm speculation that house prices are set to fall by around 10% to 15%. 

“Higher interest rates will take the steam out of the market and ease affordability for new borrowers but existing borrowers will likely be viewing rising interest rates with trepidation.”