"Before you rush to fix your home loan or bury your head in the sand, here is a quick explainer on what it is, why it's happening and how it will impact you." - Cat Mapusua, General Manager
The Reserve Bank of Australia (RBA) raised the nation’s official cash rate on May 3 – for the first time in 11 years – by 25 basis points, from 0.10% to 0.35%.
Since this announcement, the big four banks have consequently passed the rate hike on in full to their variable rate customers by 0.25%.
So, before you rush to fix your home loan or bury your head in the sand, here is a quick explainer on what it is, why it’s happening and how it will impact you.
Each month (except January), the RBA – which is Australia’s central bank – announces whether the official cash rate will remain the same or change.
The cash rate is essentially a figure set by the RBA that represents the interest rate that banks and lenders have to pay on the money they borrow.
The cash rate is often referred to by the RBA as the “overnight money market interest rate”, as banks frequently lend money to each other and process these transfers overnight.
The cash rate change was back in November 2020, when the RBA cut it from 0.25% to 0.10% in an attempt to minimise the impact of the global pandemic. Since this time, the cash rate has been steadily held, that is until May’s recent increase.
The RBA takes a number of things into account when considering whether to change the cash rate including inflation, employment rates, and the growth rate of the Australian economy.
While the RBA originally proposed that it didn’t expect to raise the cash until at least 2024, it changed its mind in response to soaring inflation, and evidence that workers were getting more substantial wage increases. This meant the time was right to start normalising interest rates away from emergency lows.
If you currently have a fixed home loan, your monthly repayments will see no change until your fixed term ends and your loan reverts to a variable rate. If you currently have a variable home loan, this is where you’ll see an increase.
Monthly mortgage repayment increases for those with a variable home loan will be relatively modest under the new rate rise of 0.35%. But the RBA Governor, Philip Lowe, has warned borrowers should brace themselves for further hikes in order to bring inflation back into the target band.
Under the new rate, the monthly payment on a $600,000 home loan would rise to $2324, an increase of $74. For those with a $1 million loan, repayments would rise by $130 a month.
Although, if the cash rate rises to 2% by May 2023, repayments for the average borrower with a $500,000 debt are expected to rise by about $511.
For those without a home loan or renters, the cash rates rise likely means less discretionary spending for households. Economic activity could eventually slow down and cause the inflation rate to drop due to decreased demand for goods and services.
Now is the time for homeowners and prospective buyers to pay close attention to their finances by setting and reviewing budgets.
You can also benefit significantly from reviewing your current interest rate with a lending specialist and enquiring how they can help.
Despite rising rates, experts can assist with restructures, refinances, negotiations, and advice to help get the best home loan fit for you based on your financial situation.
Source: Money Magazine