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What does the latest RBA cash rate decision mean for your home loan?

The Reserve Bank of Australia has fired off the 11th rate hike in this cycle, raising the cash rate by 0.25 percentage points to 3.85%, the highest level since April 2012 – with further rate hikes flagged in a bid to rein in inflation.

From May 2022 to May 2023, the cash rate has increased by 3.75%, from 0.10% to 3.85%. This has had a knock-on effect on variable home loan interest rates, which look set to continue rising through the year.

It’s understandable that homeowners are anxious about their home loan repayments, so below we've outlined everything you need to know about the latest RBA rise and what it means for your mortgage.

Key Points

  • Lenders have gradually raised their interest rates since last spring, indicating that they’re preparing for more rate rises.

  • A rate rise means that those paying a variable rate mortgage will likely experience costlier repayments.

  • Whether you’re buying or refinancing, MyFN can help you find the best rate for your needs from a panel of over 40 mortgage lenders.

Will interest rates increase further for homeowners in 2023?

In their fourth announcement for 2023, the RBA has indicated that the official cash rate target is set to rise further in early 2023:

"The Board judged that a further increase in interest rates was warranted today. The Board held interest rates steady last month to provide additional time to assess the state of the economy and the outlook. While the recent data showed a welcome decline in inflation, the central forecast remains that it takes a couple of years before inflation returns to the top of the target range"

Banks and other lenders are clearly taking these indications seriously. Brokers around Australia are recommending that anyone thinking about refinancing their home loan or selling should act fast to maximise their savings.

There are strategies that households can employ, such as paying extra into your mortgage if you can afford it or speaking to your lender to renegotiate your loan. But the best thing any homeowner can do is speak to a mortgage broker or a financial professional. A few phone calls could save you thousands of dollars in repayments. The same goes for anybody looking to buy. The housing market is showing signs of cooling in most locations, but buyers need to know their local market. Some cities or suburbs may have slowed down but that's not the case for the whole of Australia.

What time is the RBA cash rate decision?

The RBA meets on the first Tuesday of each month to decide on monetary policy and announce the new cash rate at 2.30pm that day, with any changes they make coming into effect the next day.

Why do interest rates go up and down?

The Reserve Bank of Australia controls the national interest rate (cash rate) to ensure we have a stable currency and avoid high inflation rates.

The RBA examines the growth of the Australian economy and decides whether to slow it down by raising the cash rate or speed it up by lowering the cash rate.

Several factors influence the rise and fall of interest rates, including:

  • Employment and wages growth - If employment levels are low, the RBA will be more inclined to lower the cash rate as a means of stimulating investment and creating more jobs. Similarly, slow wages growth can indicate slow economic growth and make it more likely that the RBA will keep the cash rate where it is.

  • Inflation - One of the RBA’s ongoing goals is to keep the inflation rate between the 2 and 3 per cent target range. If the rate of actual inflation exceeds 3%, the RBA is inclined to increase interest rates to help consumers retain their level of buying power.

  • Growth of the Australian economy - GDP represents the value of all goods and services produced in Australia. If it falls too low, the RBA may lower the official cash rate target to help stimulate the economy (if interest rates are lower, more people will buy houses, open businesses, make investments, etc.)

How does the Reserve Bank of Australia’s cash rate announcement affect interest rates?

The official cash rate affects how expensive it is for banks and other financial institutions to borrow money from one another in the overnight money markets.

This exchange of short term ‘overnight funds’ is how lenders ensure they can meet their liquidity needs each day.

Simply, if it's more expensive for lenders to borrow money, they can pass this expense on to consumers by increasing the interest rates on their products (such as home loans).

How do interest rate changes affect me if I’m looking to buy property?

If the official cash rate changes, and lenders respond by changing their mortgage rates, borrowing money costs more. This affects the interest rate you are charged on the money you've borrowed as well.

A higher interest rate means that your variable rate mortgage will have higher monthly repayments and, consequently, will take longer for you to pay off.

With more expected cash rate rises looming (and lenders raising their rates in response).

It really is a market where it pays to take action now. For example, a homeowner with a $600k variable rate mortgage would have seen their repayment rise by an average of $1,341 per month since the rate rises began in April 2022.

That's an extra $14,557 a year, so for every month a mortgage holder delays reviewing their mortgage, the they're paying more in 'loyalty tax' to their lender.

How do interest rate changes affect me if I already have a mortgage?

If you’re already paying off a variable rate mortgage, then any change the lender makes to your loan’s interest rate affects the cost of your repayments.

So, if the RBA increases the official cash rate, you will likely pay more for your mortgage each month. However, if you're still paying off a fixed rate portion of your mortgage, your repayments won’t be affected since you locked in your rate. But once your fixed rate period ends, you'll have to pay whatever variable rate the lender decides. This known as your 'revert rate', and it's usually higher than the bank's variable rate.

If you currently have a mortgage and are worried about the impact of a rate rise on your repayments, it's worth thinking about refinancing to a lower rate now.

How much more will I pay if interest rates go up?

The answer really depends on:

  1. The decision from the Reserve Bank of Australia.

  2. How your lender adjusts their interest rate in response.

Keep in mind, the RBA’s decision is not the only factor lenders look at when adjusting their interest rates. You can use our MyFN repayment calculators to work out monthly payments and how much you could save in monthly payments if you refinance.

How can I make sure I’m on the best home loan rate for me?

Even without a predicted rate rise on the horizon, it’s a good idea to periodically reassess your mortgage to see whether you can get a better rate.

There are still some competitive fixed term loans available when you look beyond the big four banks, but there's no telling how long they'll remain on offer. There's also some lower variable rate options too, so mortgage holders and purchasers have options when reviewing their loan through a broker. They may not have to put up with a higher rate just because their bank says so.

A quick and easy way to see if you can get a better offer, is to speak to a mortgage professionals like us here at MyFN. We can assist you in comparing lenders to find you the best option. By comparing home loans, you can get ahead of the rate hikes and potentially switch to a better deal.

Connect with us today and see if we can get a better deal on your home loan.


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