Banks hike rates after the RBA increases the cash rate

The Reserve Bank of Australia (RBA) yesterday increased the official cash rate by 25 basis points to 0.35% amid high inflation concerns and has signalled more cash rate increases will likely follow.

This is the first RBA cash rate hike since November 2010, and the first time the cash rate has moved since it was cut to a record-low 0.10% in November 2020.

The increase comes a week after Australian Bureau of Statistics (ABS) data showed the cost of living had jumped 5.1% over the past year – the highest annual increase in more than 20 years.

Two thirds of the quarterly increase in inflation has come from 4 items – cost of new dwellings (up 5.7%), fuel (11%), university fees (6.3%) and food (2.8%) which of course have been impacted by global supply and goods demand ie China’s pandemic problems and the war in Ukraine.

While we wait for these global supply issues to dissipate, which will in turn push inflation down, policy holders need to rely on the tried and tested method of raising interest rates to cool inflation. Therefore, the RBA has made it clear that further lifts in interest rates will occur over the period ahead.

After a few initial hikes, it is likely they will pause to wait out the impact before their next move.

What does this mean for your mortgage repayments?

All four major banks have today raised their standard variable rate (‘SVR’) by 0.25% in line with the RBA increase. In order to maintain healthy competition between the lenders we are expecting the other banks to follow suit.

How much your repayments will go up each month will depend on a number of factors, including how your particular bank responds to the cash rate increase and the size of your mortgage.

However, as an indication – on a $500,000 mortgage you can expect your repayments to increase by $65 per month, on $750,000 it will increase by $98 and on a $1,000,000 loan your repayments will be $130 higher.

Whilst rate increases are not ideal, the majority of mortgage holders who have had their loan for some time will have previously made higher repayments at some stage over the last few years before rates decreased.

So whilst it’s easy to be influenced by the media hype and panic, think back to your loan repayments before the rate hikes and remember you were paying more back then and it was manageable.

For our new mortgage holders who have only ever lived with current interest rates, dig out your budget and look at ways you can cut back to give yourself more of a savings buffer. One store bought coffee per day is $35 per week or $140 per month which can easily be replaced with a cheaper alterative and the money channelled into your increased repayments.

And when comparing the new variable rates that are still below 2.5% with the current fixed rates (of which some are in excess of 4%), we can see that for variable rate loan holders there is still plenty of opportunity to have low repayments.

The key take away here is that it’s now more important than ever to ensure you are on the best possible interest rate to ensure you have the lowest repayments. This will allow you to have more savings to build up a cash buffer to protect your budget when interest rates rise again.

Similarly, if you’re already on a fixed rate, now is the time to start squirreling away those extra funds (or cutting back those coffees!) to ensure your repayments can still be met comfortably when your low fixed rate expires and will revert to a higher variable rate.

We are offering complimentary loan reviews so feel free to get in touch with us today to explore some options, which could include refinancing ahead of any other future RBA cash rate hikes that the RBA has signalled.

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