The Reserve Bank of Australia (RBA) has increased the official cash rate for a tenth straight meeting, taking it to 3.60%. How much will this rate hike increase your monthly mortgage repayments, and how many more rate rises are expected to come?
However, in somewhat hopeful news for mortgage holders, RBA Governor Philip Lowe has softened his language around the timing of future rate hikes.
While last month he said “further increases in interest rates will be needed over the months ahead”, no such statement was included in this month’s rate hike announcement.
In assessing when and how much further interest rates need to increase, Governor Lowe said the RBA board will be “paying close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market”.
“The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that,” he added.
How much could this 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 $985 a month on your mortgage compared to 1 May 2022.
If you have a $750,000 loan, repayments will likely increase by about $112 a month, up $1478 from 1 May 2022.
Meanwhile, a $1 million loan will increase by about $150 a month, up about $1,980 from 1 May 2022.
What happens if the cash rate increases further?
The big four banks are forecasting that the cash rate will peak at either 3.85% (CBA’s prediction) or 4.10% (NAB, Westpac and ANZ). While many expect property prices to dip, there have been some surprising turns in the property market.
But let’s focus on the impact on your mortgage repayments:
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 extra per rate rise = up $1135 from 1 May 2022, to a total of $3,470 per month.
– $750,000 loan: approximately $112 extra per rate rise = up $1702 from 1 May 2022, to a total of $5,200 per month.
– $1 million loan: approximately $150 extra per rate rise = up $2280 from 1 May 2022, to a total of $6,950 per month.
What happens when cash rate increases?
When the cash rate increases, it becomes more expensive for banks to borrow money from the Reserve Bank of Australia (RBA). This leads to an increase in the interest rates that banks charge their customers for loans and mortgages. As a result, consumers may be more reluctant to borrow money, which can slow down the economy and reduce inflation.
How does the RBA cash rate affect you?
The RBA cash rate can affect consumers in a number of ways. When the cash rate is lowered, it can lead to lower interest rates on mortgages and loans, which can make it easier and more affordable for people to borrow money.
On the other hand, when the cash rate is raised, it can result in higher interest rates and increased borrowing costs. The cash rate can also impact the strength of the Australian dollar, which can affect the cost of goods and services.
For worried property investors, rising interest rates isn’t necessarily a negative thing, as long as the rates are lower than their capital growth.
Why is inflation so high in Australia?
It’s all thanks to a bunch of different factors, like the COVID-19 pandemic, Russia’s invasion of Ukraine, and strong consumer demand.
The Australian Bureau of Statistics recently revealed that our inflation rate hit a whopping 7.8% for the year up to December 2022 – the highest level since 1990! And the quarterly inflation rate was up by 1.9%.
While many economists predicted it would be around 7.5%, the 7.8% figure was in line with Treasury estimates that inflation would peak at around 8% by the end of 2022.
The ABS figures also showed that the steep rise in the cost of new dwellings, domestic holidays, travel and accommodation, and fuel costs were the main drivers behind the annual inflation increase.
Who makes money when interest rates go up?
When interest rates go up, lenders such as banks and financial institutions can benefit by earning higher interest on the loans they make to consumers and businesses.
Additionally, investors who have invested in fixed-income securities such as bonds can earn higher returns. On the other hand, borrowers such as consumers and businesses may face increased borrowing costs, which can impact their ability to borrow money and grow their businesses.
Worried about your mortgage? Call 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 include 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. The earlier we sit down with you and help you make a plan, the better we can help you manage any further rate hikes.