Biggest cash rate hike in 22 years: What it means for your mortgage

The Reserve Bank of Australia (RBA) has raised the cash rate by 50 basis points to 0.85%, with home loan borrowers warned that their monthly repayments could increase by as much as a third if rate hikes continue as widely predicted.

The RBA board has raised the cash rate for the second time in as many months, with variable rate home loan borrowers likely to be hit with another increase to their monthly repayments, as banks follow suit and raise their own interest rates. The hike is the biggest single increase since February 2000, when the RBA also raised the cash rate by 50 basis points.

The RBA set the cash rate at the lowest-ever point of 0.10% in November 2020, in an attempt to guide the Aussie economy through the effects of the COVID-19 pandemic.

It was originally predicted to remain steady until 2023 or 2024, but in the face of recent economic developments such as a soaring inflation rate the RBA’s board decided to act sooner, raising the rate in May 2022 before doing so again at the June meeting.

Explaining the reason for the larger than expected hike, RBA governor Philip Lowe said:

“Higher prices for electricity and gas and recent increases in petrol prices mean that, in the near term, inflation is likely to be higher than was expected a month ago. As the global supply-side problems are resolved and commodity prices stabilise, even if at a high level, inflation is expected to moderate. Today’s increase in interest rates will assist with the return of inflation to target over time.”

How could June’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, meaning many homeowners could soon see their monthly repayments go up following the announcement.

Canstar has crunched the numbers on how the cash rate hike could affect a hypothetical borrower with the average owner-occupier variable interest rate on our database of 3.17%, based on a range of home loan sizes. The estimates below factor in potential increases in minimum monthly loan repayments, plus the overall financial impact of the additional interest over the life of a 30-year loan.

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

• 0.50 percentage point rate rise: $139 more in monthly repayments.

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

• 0.50 percentage point rate rise: $208 more in monthly repayments.

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

• 0.50 percentage point rate rise: $278 more in monthly repayments.

Source: www.canstar.com.au – 7/06/2022. Average variable rate of 3.17% based on owner-occupier loans on Canstar’s database available for a loan of $500,000, with an 80% loan-to-value ratio (LVR) and principal & interest repayments; excluding introductory and first home buyer-only loans. Monthly repayment calculations exclude fees and assume a total loan term of 30 years.

Mortgage repayments could jump by a third

In his statement, Dr Lowe said that it was likely that the cash rate would continue to go up, but added that the “size and timing of future interest rate increases will be guided by the incoming data and the Board’s assessment of the outlook for inflation and the labour market”.

Previously, the RBA has indicated the cash rate may reach 2.5% by the end of 2023, which would see the average variable rate rise to 5.32% assuming lenders passed on cash rate increases in full and made no other rate changes. To put this figure in context, it would mean that repayments on a 30-year, $500,000 loan would rise by almost one third, increasing by around $629 to $2,783 per month.

This is certainly a cause for concern, with a recent Canstar survey of 2,334 Australian adults finding a majority (55%) either couldn’t afford or didn’t know if they could afford their home loan repayments or rent if these costs were to rise by a third.

Around one-fifth of those who responded (18%) said that they could afford an increase like this, but would need to cut back on other costs to get by.

Household budgets left with “little wiggle room”

Canstar’s Editor-at-Large and money expert Effie Zahos said Aussies were being hit with higher costs from “every side” right now, and that these latest survey figures indicate there is “little wiggle room left in household budgets.”

“Australians are seeing price hikes across several household bills,” she said.

“When you get hit with higher costs on just about every household bill, juggling the extra costs can become difficult as consumers need to be efficient with where they redirect any savings.

“It’s not just homeowners doing it tough through higher loan repayments. While interest rates don’t have a direct impact on rental values they do have some indirect consequences, which could see rental prices move even higher.”

Is now the time to lock in a fixed rate?

With interest rates expected to rise further in the months and years to come, you may be wondering whether now is the time to lock in a fixed rate home loan, while you can find a reasonably low rate. If you’d like to know more, we’ve weighed up some of the pros and cons of fixing your home loan, to give you some food for thought in this area.

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.

Cover image source: Dragen Zigic/Shutterstock.com.