After its January pause, the RBA delivers another blow to Aussies and lifts the cash rate to 3.35% – the highest rate since September 2012. From mortgage holders to everyday Australians, the rate rise means bad news as it further restricts the already-tight household budget.
Let’s take a look at how the cash rate has panned out in 2022, what this means for borrowers and how you can safeguard your finances amidst the rate hikes this year.
What is the cash rate now?
Following record-high inflation of 7.8% in the December 2022 quarter, the current official cash rate now sits at a whopping 3.35%. This marks the Reserve Bank of Australia’s (RBA) ninth consecutive rate hike since May 2022.
According to Treasurer Jim Chalmers, “Inflation was the defining challenge in our economy in 2022, and it will be a defining challenge in our economy in 2023.”
Going back to his statement in December 2022, RBA governor, Philip Lowe, mentioned that the cumulative increase since May “has been necessary to ensure that the current period of high inflation is only temporary.”
With inflation nearing 8%, higher rates may be inevitable to bring inflation down to the central bank’s 2-3% target range.
In his statement following the February cash rate announcement, Lowe indicated, “Global inflation remains very high. It is, however, moderating in response to lower energy prices, the resolution of supply-chain problems and the tightening of monetary policy.”
“Inflation is expected to decline this year due to both global factors and slower growth in domestic demand. The central forecast is for CPI inflation to decline to 4¾ per cent this year and to around 3 per cent by mid-2025,”
“Medium-term inflation expectations remain well anchored, and it is important that this remains the case,” he continued.
Cash rate vs interest rate
In simpler terms, the cash rate refers to the rate at which banks and lenders pay when borrowing in the money market. Since the cash rate affects the cost of borrowing for banks, this impacts the interest rate they pass to borrowers.
The interest rate is the rate that banks and lenders charge clients and businesses for borrowing money. In other words, mortgage interest rates are high when the cash rate increases, but they are low when the cash rate decreases.
How high will the cash rate go?
Since inflation is still far from the RBA’s goal, experts predict further rate hikes in 2023 before the bank hits pause.
Among the big four banks, the Commonwealth Bank has the most favourable forecast for homeowners. CBA suggests that this Tuesday marks the central bank’s final rate hike as it pauses and reassesses the impact of the previous decisions of the Board.
Meanwhile, NAB predicts that Australians will go through two more hikes before the rate peaks at 3.60% by March 2023.
Westpac and ANZ both show grim predictions that the cash rate will peak at 3.85% this year before finally settling.
In a more striking warning, Deutsche Bank forecasts that the cash rate will even tip at a shocking 4.10%.
While the big banks differ in their findings, one thing is for certain – this can signal more financial pain for everyone.
How much will repayments rise?
While repayments will increase, Lowe claimed that the “monetary policy operates with a lag and that the full effect of the cumulative increase in interest rates is yet to be felt in mortgage payments.”
Based on RateCity.com.au’s calculations, the average Australian on a $500,000 home loan will see their monthly repayments jump by $908 per month with the additional 25 basis points.
For borrowers with a $1-million mortgage, they will be slammed by $1,816 more a month.
| Loan size | February increase | Total increase May-Feb |
| $500,000 | $76 | $908 |
| $750,000 | $114 | $1,362 |
| $1 million | $152 | $1,816 |
Source: RateCity.com.au. Based on an owner-occupier paying principal and interest with 25 years remaining.
Variable-rate borrowers are not the only ones staring in front of a gun barrel.
Considering that many took advantage of the low fixed rates in 2020 and 2021, they remained immune to the rate hikes in 2022. However, based on the RBA, up to 800,000 fixed loan contracts are facing a mortgage cliff this 2023.
Mortgage cliff refers to the looming increase in repayments that homeowners experience when their fixed term ends. This means that fixed-rate borrowers will feel the pinch of the aggressive rate hikes at full speed as their loans double up to 6% after their fixed terms roll over to standard variable rates.
To estimate how the rate hikes affect your repayments, you can easily use our home loan repayment calculator.
Ways to improve your financial situation amidst rate hikes
In case you’re struggling to cope with the high rates or looking for ways to avoid interest rate shock when your fixed rate expires, now is not the time to wait around. Here are some things you can do to combat mortgage stress:
Ask for a rate cut
Review your rate and compare it to what your lender offers to its new customers. If you find your rate higher, try to negotiate and ask for a rate cut. This can help you create a bit of breathing room in your monthly budget as you work your way through the rate hikes.
Refinance
If your lender refuses to give you a lower rate, shop around, compare different lenders and consider if refinancing your home loan will help you save more. There’s always a more competitive offer out there, so consult with a broker to know your options.
Moreover, some lenders offer generous cashback. For example, you may qualify for up to *$4,000 cashback when you refinance with It’s Simple now. You can always schedule a call with our trusted brokers to refinance without the hassle.
Make extra repayments
While your rate is still low, try to make extra repayments if possible. This may require a bit of sacrifice for the short term, but this will be worth it in the end as you reduce the total interest you pay over the life of your loan. Moreover, this helps you pay off your mortgage early.
Use your offset accounts
If you have offset accounts, take advantage of this feature to save more. An offset account is an account directly linked to your home loan.
Any amount you deposit into this account is offset against your interest payable. For example, if your loan is $800,000, and you have $40,000 in your offset account, you will only pay the interest on $760,000 instead of $800,000.
To further help you, here are the 3 things you need to know to prepare for a rate hike:
Will interest rates fall in 2023?
As inflationary pressures grow and become more widespread, the RBA expects to take all measures necessary to keep inflation under control:
“The Board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary,”
“In assessing how much further interest rates need to increase, the Board will be paying close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market.”
Need help with your home loan or finance? Prepare and control your loan with our mortgage brokers. It’s Simple will help you break down your options, enjoy tailored choices from the top 40+ banks and lenders in Australia and help you choose and apply for the right loan solutions.
You can email us today at info@itssimple.com.au or book a free expert consultation at your preferred schedule.
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