labelCategory: RBA Cash Rate
The Reserve Bank of Australia (RBA) increased the cash rate by 25 basis points today, taking it to 3.6%.
How Does The Cash Rate Increase Affect My Interest Rate?
Lenders add a margin to the official cash rate to determine the variable interest rate they offer to customers. So if you have a variable interest rate, it will almost certainly go up with the cash rate increase.
How Much Is My Monthly Repayment Going to Increase?
The following chart shows how much the extra quarter percentage point in interest will cost homeowners, based on the size of their loan. (These example loan repayments were determined using our repayment calculator, based on the lowest variable rate we can offer over a 30-year term, as of 7 March 2023. Rates are subject to change from this date.)
|Loan Amount||Before Increase (%)||After Increase (%)||Difference|
Cash Rate Will Keep Increasing Until Target Inflation Is Reached
In his statement on the RBA’s decision, Governor Dr Philip Lowe said, “The board’s priority is to return inflation to target. High inflation makes life difficult for people and damages the functioning of the economy. And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment. The board is seeking to return inflation to the 2–3% target range while keeping the economy on an even keel, but the path to achieving a soft landing remains a narrow one.
“Growth in the Australian economy has slowed, with GDP increasing by 0.5 per cent in the December quarter and 2.7 per cent over the year. Growth over the next couple of years is expected to be below trend. Household consumption growth has slowed due to the tighter financial conditions and the outlook for housing construction has softened. In contrast, the outlook for business investment remains positive, with many businesses operating at a very high level of capacity utilisation.”
Home Loan Experts CEO Alan Hemmings said, “The 0.25%-point increase marks the 10th meeting in a row the Reserve Bank has increased rates. The cash rate has increased from 0.1% to 3.6% during that time. This means repayments on a variable rate loan of $500,000 have increased by over $850 a month in that period.
“Given some lenders have already increased fixed rates, all lenders are expected to pass on the quarter-point increase. Before this rate hike, a couple of lenders were still offering variable rates below 5%. Given this latest announcement, however, it is now expected that no interest rates will be available below that level.”
What’s the outlook for interest rates? Hemmings comments, “It is expected this round of cash rate rises will be finished by the middle of the year. Unfortunately, some economists are predicting another two increases. We may see that the RBA slows the increases, so they do not happen every month. We are only now starting to see the impact of the previous rate rises and more clients will be converting from very cheap fixed rates to variable ones over the coming months. Inflation will start to slow, we hope, and give the Reserve Bank an opportunity to slow cash rate rises and provide some stability for home loan customers.”
A Mortgage Broker Can Help Navigate The Rate Rise
Hemmings also emphasised that as interest rates have been moving every month, customers are finding it difficult to say on top of their actual rate and how it compares in the market.
“The best option now would be to speak to a mortgage broker,” he says. “The market share for mortgage brokers has increased because they know what is happening with the interest rates and understand which lenders offer incentives like refinance rebates and where a borrower may be best placed to maximise their borrowing potential. All lenders will now calculate affordability using an interest rate of over 8% (5%-plus advertised interest rate, plus the 3-point buffer regulators require) so understanding this will be important.
Home Loan Experts’ brokers can guide you through the right steps to prepare you for a rise in interest rates, whether through refinancing or simply managing your home loan more effectively. Call us on 1300 889 743 or complete our free online assessment form today.