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Borrowers warned lenders will "waste no time" passing on today's cash rate hike
05 July 2022
The Reserve Bank of Australia (RBA) has raised the cash rate by 50 basis points to 1.35%, with experts anticipating that banks and other home loan providers will pass on the rate hike in full to customers.
The RBA board raised the official cash rate for the third time in as many months, with variable rate home loan borrowers in particular likely to feel the impact of the rate rise as banks and other lenders respond over the coming days.
Rate hikes have become the new normal in Australia, with the first Tuesday of the month becoming an ominous presence in the calendars of many borrowers who have copped significant increases to their home loan repayments since the RBA got the ball rolling in May of this year.
Governor Philip Lowe has warned that we’ll likely see this trend continue until the end of the year as the central bank tries to tackle the current soaring inflation rate. Yet again Aussies can expect to see today’s rate hike passed on by banks and other lenders.
Banks likely to pass on the hike in full
Canstar finance expert Steve Mickenbecker says most home loan borrowers on variable rates are likely to feel the effect of the cash rate hike sooner rather than later.
“Lenders have wasted no time following the Reserve Bank with home loan interest rate increases, and an overwhelming majority have passed on the full 0.75 percentage points since the May cash rate rise,” said Mr Mickenbecker.
“You would have to anticipate the same now that we’ve seen another increase in July.”
He said that since rates started rising in May, borrowers on a $500,000 loan may already be paying an additional $207 extra on their monthly mortgage repayments*, and that further rises are likely to hit Aussies in the hip pocket.
“With borrowers already dealing with minimal wage increases alongside higher-priced petrol, power, groceries and bills, it is little wonder they are becoming concerned,” he said.
It isn’t all bad news, though. The silver lining of a rising cash rate is that many Australians will also see higher interest rates on their savings accounts and term deposits.
How could July’s cash rate hike affect your mortgage?
When the RBA raises the cash rate, banks and lenders tend to pass this along to home loan borrowers in the form of higher variable interest rates, so following today’s announcement, borrowers are likely to see a comparable rise in their rates in the days and weeks to come.
Canstar has crunched the numbers on how the July cash rate hike could affect a hypothetical borrower with the average owner-occupier variable interest rate on our database, based on a range of home loan sizes. The estimates below factor in potential increases in minimum monthly loan repayments.
How could a rate rise affect a $500,000 home loan?
- 0.50 percentage point rate rise: $144 more in monthly repayments.
How could a rate rise affect a $750,000 home loan?
- 0.50 percentage point rate rise: $216more in monthly repayments.
How could a rate rise affect a $1,000,000 home loan?
- 0.50 percentage point rate rise: $288 more in monthly repayments.
Source: www.canstar.com.au – 05/07/2022. Current average variable rate based on owner-occupier loans on Canstar’s database, available for a loan amount of $500,000, with an 80% loan-to-value ratio (LVR) and principal & interest repayments; excluding introductory and first home buyer-only loans.
Could locking in a fixed rate save you money?
With months of interest rate rises still likely for Aussie borrowers, you may be wondering whether now is the time to lock in a fixed rate home loan.
If you’d like to know more, Canstar has weighed up some of the pros and cons of fixing your home loan. In brief, some potential advantages of fixing your home loan can include:
- the certainty of knowing your repayments will remain the same each month, regardless of the movement of interest rates, and
- protection from rate rises, if variable rates climb high.
Some potential downsides can include the fact that:
- fixed rate home loans tend to come without features such as offset accounts and redraw facilities, which can be useful, and
- breaking out of a fixed rate home loan can be expensive.
It is also worth keeping in mind that, even with rates currently rising, variable interest rates in Australia still tend to be lower than fixed ones.
For example, a survey of home loan rates on Canstar’s database for the week ending 27 June 2022 found that the average overall variable rate home loan rate for owner-occupiers was 3.53%. In comparison, the average one-year fixed rate was 4.02%, while the average two-, three-, four and five-year fixed rates were 4.66%, 5.06%, 5.44% and 5.54% respectively.
If you’re looking for a low home loan rate, you can compare home loans with Canstar to see if you can find a lender offering a deal that meets your needs and circumstances.
* Calculations based on a hypothetical owner-occupier borrower making principal and interest repayments on a 30-year variable rate loan. The starting rate is 2.98%, which was the average rate for this type of home loan prior to the May cash rate increase. The estimated $207 monthly repayment increase assumes an interest rate increase of 0.75 percentage points in line with the May and June cash rate increases.
Cover image source: Cast Of Thousands/Shutterstock.com
This article was reviewed by our Sub Editor Tom Letts before it was updated, as part of our fact-checking process.
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