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Everything homeowners need to know about the cash rate hike
The Reserve Bank of Australia has hiked the cash rate by 50 basis points to 0.85% at its June meeting. This was its second hike to the cash rate in over a decade, and homeowners will no-doubt be feeling the pinch.
This means that home loan borrowers on a variable interest rate will once again see their mortgage repayments increase. And while the dollar value may only be tens of dollars today, experts predict that the cash rate will continue to hike over the next two years.
What the latest cash rate hike means for you
Homeowners on variable interest rate mortgages could see their lender pass on the rate hike of 50 basis points in full. As your interest rate is one of the most significant factors impacting your repayment costs, a higher interest rate will mean greater mortgage repayments.
For homeowners still locked in at a fixed interest rate, while your home loan repayments will not change this month, it’s worth keeping in mind that your fixed rate period will end. Your lender will then likely revert your interest rate to its standard variable rate, which may now be much higher than when you first fixed your rate.
And if you’re considering just refinancing to a new fixed rate, lenders have been consistently hiking fixed rates for months. Meaning, that when you move to re-fix your home loan rate you may find that the interest rate on offer is also much higher than expected.
Whichever way you look at it, a lender increasing home loan interest rates in line with the Reserve Bank of Australia’s (RBA) cash rate means that homeowners will be paying more in interest charges. Whether the homeowner experiences higher rates today or in two years, it’s always safe to assume interest rates will fluctuate over a 20-30-year home loan.
When will the changes impact you
The interest rate hike may not come immediately. In fact, your lender is likely to announce a commencement date for its rate hike. To keep track of if, and when, your home loan lender announces an interest rate hike and when the hike is set to commence, it may be worth checking out RateCity’s Rate Tracker page.
Interest charges are typically calculated daily and charged monthly on a specific due date set by your lender. The actual date that the latest cash rate hike will impact your mortgage repayments will depend on the rate hike commencement date set by your lender, and when in the month your lender charges your interest payments.
If you want more detailed information on exactly when and how your home loan repayments will increase, it may be worth speaking to a customer representative from your lender.
Disclaimer
This article is over two years old, last updated on June 7, 2022. While RateCity makes best efforts to update every important article regularly, the information in this piece may not be as relevant as it once was. Alternatively, please consider checking recent home loans articles.
Calculate how much higher your repayments may be
How much more will you pay?
RateCity has crunched the numbers on home loan repayments for a homeowner with a 25-year $500,000 mortgage paying the average owner-occupier variable rate for existing customers in April 2022 of 2.89%, according to RBA data.
Assuming the lender passed on both hikes in full, with the cash rate now at 0.85% this would mean their interest rate has increased to 3.61% (May hike of 25 basis points, June hike of 50 basis points).
Their monthly home loan repayments would increase from $2,335 in April to $2,532 after the June hike. This is an extra monthly repayment of $197 after this hike.
| Starting month | Average interest rate | Estimated repayment |
| Apr-22 | 2.89% | $2,335 |
| May-22 | 3.11% | $2,400 |
| Jun-22 | 3.61% | $2,532 |
Source: RateCity.com.au, RBA Interest Rates (Avg Apr-22). Based on 25-year, $500k mortgage. Does not factor in fees.
What does the future look like for interest rates in Australia?
According to forecasting from the big four banks, homeowners may need to brace themselves for multiple cash rate hikes over the next few years. Here is how high the big banks have predicted the cash rate could climb:
- CommBank – 1.60% cash rate by February 2023
- Westpac – 2.00% cash rate by May 2023
- ANZ – 2.25% cash rate by May 2023
- NAB – 2.60% cash rate by August 2024
It’s important to remember that these are simply just predictions based on the current modelling and may be subject to change. What this means for homeowners is that interest rates on home loans may increase by between 1.25 – 2.50 percentage points between 2022-2024.
So, for a homeowner that was paying a variable rate of 2.89% in April, they could see their rates rise to 5.39% by August 2024.
And on that same hypothetical 25-year, $500,000 home loan, assuming your lender passed on every single rate hike, your monthly repayments would become $3,038 per month. This is an increase of $695 to your monthly mortgage repayments over a two-year window, assuming this forecasting were to come to fruition.
Why is the Reserve Bank hiking interest rates now?
The RBA looks at an extensive range of macroeconomic factors when determining how to set the cash rate at its board meeting each first Tuesday of the month (excluding January). Regarding the 2022 cash rate increases, this has mainly been driven by higher inflation levels.
RBA Governor Philip Lowe had noted for years that they were looking for inflation levels to reach a target of around 2-3% growth before they would consider lifting rates, so this has been a considerably influential factor.
According to AMP Chief Economist, Shane Oliver, what really changed in May 2022 to push the RBA’s hand is that “the jobs market, with just 4% unemployment and inflation at 5.1% year-on-year… have been far stronger than the RBA expected…”
As annual inflation has climbed over 5.1% - the highest level seen since the 1990s – the RBA is moving to try and cool inflation. And this is not just occurring in Australia, with central banks across the globe hiking their benchmark rates to curb rising inflation, including the US Federal Reserve and the Bank of England.
By raising interest rates, the theory is that you can help to slow down an economy. By making credit more expensive, you will have less purchasing power, encouraging Australians to spend less and save more. For example, if you were considering purchasing a new car this year, higher interest rates on car loans may force you to hold off and save your cash.
When borrowing money becomes more expensive, you will see demand for goods and services lower. While we may not see prices go down right away, particularly in a time of serious cost-of-living pressures, the rate of inflation should decline – in theory.
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