The Reserve Bank of Australia (RBA) today announced the cash rate increased from a record-low 0.1% to 0.35%.
This is the first time the RBA made a change to the cash rate since November 2020 saying now was the right time to begin withdrawing some of the “extraordinary support that was put in place to help the Australian economy during the pandemic”.
It said it was committed to doing what was necessary to ensure inflation in Australia returns to target, which will require a further lift in interest rates over the period ahead.
But what does a jump in the cash rate mean for you, and how much could future cash rate increases impact your pocket? We’ll start by breaking down what the cash rate is and how this comes into play with banks and lenders.
What is a cash rate?
The cash rate is a number set by the RBA which is the interest rate that banks and lenders pay on the money they borrow. The RBA announces the official cash rate on the first Tuesday of every month (except January).
The RBA considers a number of factors when deciding whether to change the cash rate. For example, if inflation is too high, increasing the cash rate could help cool it down. If unemployment is too high, decreasing the cash rate could encourage more investment and spending to create more jobs.
How does the cash rate affect me?
While the cash rate itself doesn’t directly impact you, banks and lenders tend to look to the cash rate as a component of their calculation for interest rates. And that is where you could feel the impact.
When the cash rate is low, banks and lenders will tend to offer lower interest rates across loans as well as savings accounts. When the cash rate rises, the interest rates offered by banks and lenders will also likely rise.
What is predicted for the cash rate?
Economists from the big four banks had previously predicted the cash rate would rise today to .25% (an increase of 15 percentage points). There is speculation the cash rate will continue to rise incrementally by 25 percentage points with Westpac predicting it will hit 2% by May 2023. NAB predicted it would reach 2.5% by August 2024, while ANZ predicted it could peak above 3% at some point in 2023.
How much will interest rate rises impact home loan repayments?
We can see lenders already increasing fixed-rate home loan rates in what many anticipate to be a trend we will continue to see. Part of the reason for this is the increase in the cash rate. We will also likely see variable rates increasing as the cash rate grows. Your repayments will depend on a number of factors including whether your loan is fixed, variable or a split and the size of your loan. If your loan is fixed, your repayments will not change until the end of your fixed term, when it is a good idea to speak to your broker about finding a competitive deal. If you have a variable rate loan, or a split loan, you are likely to see increases in repayments over the next number of months.
To calculate the average repayment increases, we looked at the average loan size. According to the Australian Bureau of Statistics, the average home loan in Australia for an existing property in February was $611,524. Say your variable rate is currently 3% p.a. for a 25-year term paying principal and interest with monthly repayments, your monthly repayment would be $2,900. We’ll have a look at how much more your monthly repayments may be if your interest rate increases in line with the predicted cash rate increases (today’s initial increase of 25 percentage points followed by a jump of 15 percentage points to round out the cash rate at .5% and then future rises of 25 percentage points). The following table was calculated using our home loan repayment calculator.
What if I don’t own property yet?
If you are still saving for your first home, the increase in cash rate could be in your favour. Banks often move savings interest rates in line with the cash rate, meaning as the cash rate increases we could see increased interest rates paid on your deposit. This could give your savings a boost.
On top of this, we are seeing house price growth slow around the country. According to Ray White Chief Economist Nerida Conisbee, house prices increased by 30% since the start of the pandemic, but this last quarter saw prices slow and even drop in some cities including Sydney and Melbourne.
“For the rest of the year we can expect to see much slower market conditions – prices won’t fall everywhere but we will not see the same market conditions in 2022 as we saw in 2021,” she said.
However, while price growth is slowing and interest rates could become more favourable for savers, the challenge could be in finding property to purchase.
“Compared to last year, there are 11,000 fewer homes for sale (March quarter 2022 compared to March quarter 2021),” Ms Conisbee said.
“Our own data has shown a 33% reduction in listing authorities in April (homes listed but not yet advertised) which points to a lean May.”
If you’re planning on purchasing property, speak with a broker to understand how much you may be able to borrow and to get a plan in place to hit your goals.