Reserve Bank of Australia’s interest rate increases inflict 23 per cent pay cut on workers

A person with a $500,000 mortgage earning $80,000 before Philip Lowe started hiking rates will feel like they are making less than $62,000 next financial year.

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Philip Lowe’s rapid-fire rate rises are set to cut the pay of people with home loans by more than 20 per cent in what’s been described as a “horrendous hit” to household incomes.

A single person with a $500,000 mortgage earning $80,000 when the first of a dozen hikes was announced by the Reserve Bank of Australia Governor last year will endure the equivalent of a $19,000 pay cut in 2023-24.

Before the increases began, that person had to spend $23,700 of their annual post-tax income on repaying their home loan.

But analysis by RateCity finds that such a homeowner faces forking over $38,950 to their lender next financial year.

That’s an extra $15,250 of net earnings.

RBA Governor Philip Lowe. Picture: NCA NewsWire / Martin Ollman

These detailed calculations take into account repayments made since in that time, as well as the prospect of variable home loan interest rates heading to seven per cent. They were at 2.5 per cent in May 2022.

While a person who was on $80,000 last financial year can expect to bring in about $85,000 in the next due to rising wages, the RBA’s actions will make it feel like less than $62,000 – or a pay cut of $18,000 compared to what they were earning, according to estimates by The Telegraph.

That’s a salary drop of 23 per cent.

A borrower in this predicament will go from devoting 37 per cent of their post-tax salary to their mortgage to committing a whopping 60 per cent of everything they earn.

“It is a horrendous hit,” said AMP chief economist Shane Oliver.

He said it was a record blow to household cash flows for people with a mortgage, adding to pressure from soaring food and energy prices.

Mr Oliver said that until recently, he was confident Australia would avoid recession.

AMP chief economist Shane Oliver. Picture: supplied

RateCity’s Sally Tindall has some helpful advice. Picture: Tim Hunter

But the ongoing rate hikes meant it was now a 50-50 proposition.

Other economists, including ANZ chief Adam Boyton, predicted further rate increases in July and August after official data released on Thursday showed a “very strong” increase in employment.

That would take the cash rate to 4.6 per cent and lift variable home loan rates to about seven per cent.

During the Covid pandemic, the RBA’s Mr Lowe repeatedly said it was unlikely the cash rate would rise from 0.1 per cent until 2024 – an error he has since described as “embarrassing”.

Because of drastically higher repayments, there’s also likely to be a 23 per cent pay cut for a double-income couple with $800,000 of borrowing who earn $80,000 and $40,000.

They will lose nearly $28,000 of their combined pre-tax income, The Telegraph estimates.

And a double-income couple with a $1m mortgage earning $100,000 apiece will get a pay cut of close to $17,000 each.

ACTU secretary Sally McManus said employees were hurting.

“Working people are bearing the brunt of inflation – and they are the hardest hit by interest rate rises,” Ms McManus said.

“From 2012 for a decade, Australian workers suffered historic low wage rises and with inflation, real wage cuts.

“The RBA does not seem to understand that hurting workers is no way to help the economy.”

RateCity research director Sally Tindall said households feeling the heat from rate hikes should hit the phone and start negotiating.

“Start with your biggest expense and work backwards from there,” Ms Tindall said.

Regarding mortgages, she said “if you’ve got a decent amount of equity in your home, know that you’re still in the driver’s seat when it comes to shopping around.

“Yes, mortgage rates have gone through the roof, but there are plenty of lenders still willing to throw discounts and cash incentives at your feet if you’re prepared to switch,” Ms Tindall said.

Originally published as Reserve Bank of Australia’s interest rate increases inflict 23 per cent pay cut on workers