Mortgage Interest Rates and Home Loan Repayments

During the 2007 federal election campaign, the Reserve Bank of Australia (RBA) increased interest rates by 0.25 percentage points. This was the sixth increase in official interest rates since the 2004 federal election, and the tenth increase since May 2002. The level of interest rates is likely to persist as a political issue, given that they were a key debating point between the major political parties in the 2004 and 2007 federal elections and there are expectations of persistent inflationary pressures.

The major banks’ average standard variable home loan interest rate after the 7 November 2007 increase will be 8.55 per cent per annum if the full rise is passed on. The equivalent interest rate at the 2004 federal election was 7.05 per cent per annum. The RBA changes have added at least 1.5 percentage points annually to variable rate mortgages.

According to the Australian Bureau of Statistics, the average new mortgage level on 24 November 2007 (election day) was $252 524. The repayments on a 25-year mortgage at this level would be $2042 per month at a rate of 8.55 per cent. This repayment is approximately $249 per month higher than if the same mortgage was taken at the interest rate current at the 2004 federal election.

Interest rate increases have compounded housing affordability problems because they have occurred concurrently with higher mortgage levels. An average mortgage repayment in May 2002, the date of the first of the ten RBA rate increases, would have consumed approximately 25.5 per cent of household median weekly income. Around the date of the 2004 federal election (9 October), the percentage had risen to 32 per cent. In June 2007, prior to the November 2007 rate rise, the proportion of income being consumed by mortgage repayments was 36.2 per cent. Since the June figure was published, both interest rates and average mortgage levels have increased.

Future interest rates changes are dependent on RBA decisions. The RBA is tasked with achieving a rate of inflation between 2 per cent and 3 per cent. In its November Statement on Monetary Policy, the forecast for future inflation rates—especially for the period through to December 2008—was at or above 3 per cent. This suggests that there may be more pressure on mortgage rates early in the 42^nd Parliament.

Library documents
Adrian Makeham-Kirchner, ‘Home Loan Interest Rates and Repayments (November 2007 Revision)’, Background Note, Parliamentary Library, Canberra, 2007–08.
‘Finance’, Monthly Economic and Social Indicators, Parliamentary Library, Canberra.
‘Housing Data’, Electorate Atlas, Parliamentary Library, Canberra.

Documentation
Reserve Bank of Australia Governor Glenn Stevens, Monetary Policy, 7 November 2007.
Reserve Bank of Australia, ‘About Monetary Policy’.
Reserve Bank of Australia, ‘Bulletin statistical tables: F5-Indicator Lending Rates and A2-Monetary Policy Changes’.