RBA hikes cash rate again: Borrowers facing $500 a month home loan hit

Canstar finance expert Steve Mickenbecker says banks and other lenders have been “willingly been doing the Reserve Bank’s bidding” since the initial cash rate hike in May, with the majority passing on cash rate hikes in full as interest rate increases for their home loan customers.

It is likely most home loan lenders will also pass on the August cash rate hike in full, so Canstar has crunched the numbers to find out how much today’s rate rise could affect a hypothetical borrower’s monthly home loan repayments.

Note that the below calculations are based on a hypothetical borrower with the average owner-occupier variable interest rate on our database before the May cash rate hike, with a range of home loan sizes. The estimates below factor in potential increases in minimum monthly loan repayments, based on a lender passing on all four cash rate hikes in full and making no other rate changes.

How could a rate rise affect a $500,000 home loan?

• 0.50 percentage point rate rise: $148 more in monthly repayments.

How could a rate rise affect a $750,000 home loan?

• 0.50 percentage point rate rise: $222 more in monthly repayments.

How could a rate rise affect a $1,000,000 home loan?

• 0.50 percentage point rate rise: $296 more in monthly repayments.

Source: www.canstar.com.au – 01/08/2022. Monthly repayment calculations based on a loan repaid using principal & interest repayments over a total loan term of 30 years at a loan-to-value ratio (LVR) of 80%. Repayment calculations assume a starting interest rate of 4.23% (the average owner-occupier variable rate on Canstar’s database before the May cash rate decision of 2.98% with the May, June and July cash rate increases applied in full). Repayments rounded to the nearest whole dollar.

The average home loan could be $500 a month more expensive than in April

April of this year was the last time that the RBA held the cash rate at its record low point of 0.10%, where it had been sitting since November 2020, as part of the central bank’s efforts to combat the economic effects of the pandemic. With four cash rate hikes since then, and most major banks and lenders passing them on in full, we were curious about just how much more expensive the average Aussie home loan has become since the rate rises kicked in.

Canstar research crunched the numbers and found that, factoring in today’s 50 basis point cash rate hike, assuming banks and lenders pass it on in full, the average $500,000 variable rate home loan is likely to cost $499 a month more compared to what it would have cost in April, when the cash rate was still at its lowest point.

The average $750,000 variable rate home loan could cost $749 more per month relative to what it did in April, while the average $1,000,000 variable rate home loan could cost up to $999 more per month. You may well be wondering why the RBA keeps pushing the cash rate higher and higher, and inflicting more pain on the hip pockets of Aussies who are already contending with soaring inflation and a cost of living crisis.

Source: www.canstar.com.au – 01/08/2022. Monthly repayment calculations based on a loan repaid using principal & interest repayments over a total loan term of 30 years at a loan-to-value ratio (LVR) of 80%. Repayment calculations interest rate based on a starting rate of 4.23% (the average owner-occupier variable rate on Canstar’s database before the May cash rate decision of 2.98% with the May, June and July cash rate increases applied in full). Repayments rounded to the nearest whole dollar.

Why does the RBA keep hiking the cash rate?

As stated in its charter, one of the RBA’s key roles is to maintain the stability of the Australian financial system. Part of this involves setting the cash rate each month in line with economic conditions, which at the moment means attempting to combat rising inflation.

Inflation means an increase in the cost of goods and services and the inflation rate is typically measured using the Consumer Price Index (CPI). Based on figures released last week, Australia’s annual inflation rate hit a 21-year high, driven by major increases in the cost of fuel and new dwellings, as well as grocery staples like vegetables, the price of which rose by 14.6% in the past twelve months.

The RBA has a target inflation rate of 2% to 3%, and increasing the cash rate is a way to achieve this, because doing so generally encourages lenders to increase the interest rates they charge to borrowers, including people who are paying off home loans.

More expensive home loan repayments can mean less money for the average consumer to spend in the retail sector, thereby theoretically cooling demand and leading to a decrease in inflation.

It is worth bearing in mind, though, that demand is only one factor that affects inflation. As Canstar finance expert Effie Zahos points out, current supply chain issues caused by COVID-19 and conflicts like the war in Ukraine have also pushed up the price of certain goods, and it’s quite likely we’ll see more pain on that front before any sort of relief.

How can you compare home loans?

If you’ve seen your home loan rate going up in recent months, you can take a look at the current home loan interest rates to see how yours measures up. If you’re thinking about refinancing, you can also compare home loans with Canstar to see if there’s a more suitable deal out there for you.