The Reserve Bank of Australia (RBA) has increased the official cash rate for the 11th time in the past year, taking it to 3.85%. Have we finally reached the peak of this cycle? And how much will this latest rate hike increase your monthly repayments?
In what will undoubtedly be tough news for many households around the country, this latest rate hike comes despite many pundits predicting the RBA would keep the cash rate on hold for at least another month.
RBA Governor Philip Lowe said while inflation in Australia had passed its peak, at 7% it was still too high and it would take some time before it was back in the target range of 2-3%.
“Given the importance of returning inflation to target within a reasonable timeframe, the Board judged that a further increase in interest rates was warranted today,” he said.
However, in what may come as welcome news to mortgage holders, Governor Lowe softened his language around the possibility of further rate hikes.
“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve,” he said.
How much could this latest hike increase your mortgage repayments?
Unless you’re on a fixed-rate mortgage, the banks will likely follow the RBA’s lead and increase the interest rate on your variable home loan very shortly.
Let’s say you’re an owner-occupier with a 25-year loan of $500,000 paying principal and interest.
This month’s 25 basis point increase means your monthly repayments could increase by almost $75 a month. That’s an extra $1,060 a month on your mortgage compared to 3 May 2022.
If you have a $750,000 loan, repayments will likely increase by about $112 a month, up $1590 from 3 May 2022.
Meanwhile, a $1 million loan will increase by about $150 a month, up about $2,130 from 3 May 2022.
What happens if the cash rate increases further?
Economists at the big four banks are forecasting that the cash rate will now either remain at 3.85% or have one more hike to 4.10%.
Assuming you’re an owner-occupier with a 25-year loan, here’s how much more you could be paying each month if the cash rate reaches 4.10%:
– $500,000 loan: approximately $75 more = up $1135 from 3 May 2022, to a total of approximately $3,470 per month.
– $750,000 loan: approximately $112 more = up $1702 from 3 May 2022, to a total of $5,200 per month.
– $1 million loan: approximately $150 more = up $2280 from 3 May 2022, to a total of $6,950 per month.
Worried about your mortgage? Contact Soho Home Loans
There’s no denying that a lot of households around the country are feeling the pain of these rate rises.
There are also lots of people on fixed-rate home loans wondering just what options will be available to them once their fixed-rate period ends.
Some options we can help you explore include refinancing (which could involve increasing the length of your loan and decreasing monthly repayments), debt consolidation, or building up a bit of a buffer in an offset account ahead of more rate hikes.
So if you’re worried about how you might meet your repayments going forward, give Soho Home Loans a call today. We can help with everything from understanding why houses are so expensive in Australia to giving you more financial options. The earlier we sit down with you and help you make a plan, the better we can help you manage any further rate hikes.
Why did they increase the cash rate?
The Reserve Bank of Australia (RBA) increased the cash rate in May 2023 to 3.85%, from 3.6%. This was the 11th consecutive rate hike, and it came as the RBA sought to rein in inflation, which was running at 7% at the time. The RBA’s decision was also influenced by the strong labor market, which had seen the unemployment rate fall to 3.9%.
What is meant by cash rate?
The cash rate is the interest rate that banks charge each other for overnight loans. It is the central bank’s main tool for influencing monetary policy and is set by the Reserve Bank of Australia (RBA). When the RBA raises the cash rate, it becomes more expensive for banks to borrow money, which in turn leads to higher interest rates for consumers and businesses.
What happens if the cash rate is too high?
If the cash rate is too high, it can lead to a number of negative consequences, including:
- Higher borrowing costs for consumers and businesses, which can dampen economic activity
- A decline in investment and job creation
- A stronger Australian dollar, which can make imports more expensive and hurt exports
- A rise in household debt, which can make households more vulnerable to financial shocks
The RBA will need to carefully balance the need to contain inflation and a potential housing crisis with the need to avoid these negative consequences as it continues to raise rates.