The Reserve Bank of Australia (RBA) raised the country’s official exchange 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 four major banks have thus fully passed on the rise in rates to their customers at variable rates of 0.25%.
So before you rush out to fix your home loan or bury your head in the sand, here’s a quick explainer of what it is, why it happens, and how it will affect you.
What is the cash rate?
Every month (except January), the RBA – which is Australia’s central bank – announces whether the official exchange rate will stay the same or change.
The cash rate is basically a figure set by the RBA that represents the interest rate that banks and lenders must pay on the money they borrow.
The spot rate is often referred to by the RBA as the “overnight money market interest rate” because banks frequently lend money to each other and process these transfers overnight.
Why is it going up now?
The cash rate change was back in November 2020, when the RBA reduced it from 0.25% to 0.10% in a bid to minimize the impact of the global pandemic. Since that time, the spot rate has held steady, ie until the recent rise in May.
The RBA considers a number of factors when considering changes to the cash rate, including inflation, employment rates and the growth rate of the Australian economy.
While the RBA initially proposed it didn’t expect to raise funds until at least 2024, it changed its mind in response to soaring inflation and evidence that workers were getting pay rises. more substantial. This meant that now was the time to start normalizing interest rates away from emergency lows.
How does this affect home loans?
If you currently have a fixed rate home loan, your monthly repayments will not change until the end of your fixed term and your loan will revert to a variable rate. If you currently have a variable home loan, this is where you will see an increase.
Monthly mortgage repayment increases for those with variable rate mortgages will be relatively modest under the new 0.35% rate hike. But RBA Governor Philip Lowe warned borrowers they should prepare for further hikes to bring inflation back into the target range.
Under the new rate, the monthly payment on a $600,000 home loan would increase to $2,324, an increase of $74. For those with a $1 million loan, repayments would increase by $130 per month.
Although, if the cash rate increases to 2% by May 2023, repayments for the average borrower with $500,000 in debt are expected to increase by around $511.
For those without mortgages or tenants, higher cash rates likely mean less discretionary spending for households. Economic activity could eventually slow down and lead to a lower rate of inflation due to lower demand for goods and services.
What can you do now?
Now is the time for owners and potential buyers to pay close attention to their finances by establishing and reviewing their budgets.
You can also benefit greatly from reviewing your current interest rate with a loan specialist and learning how they can help you.
Despite rising rates, experts can help with restructurings, refinances, negotiations and advice to help you get the best home loan for you based on your financial situation.
Receive stories like this in our newsletters.