RBA increases cash rate to 2.85%: How does this affect your mortgage?

The RBA increased the cash rate to 2.85%. How high will interest rates climb, and how does the rate hike affect mortgages? We explain it here.
joseph@itssimple.com.au

joseph@itssimple.com.au

November 1, 2022

rba increases cash rate to 2.85

The RBA makes another bold move and increases the cash rate by another 25 basis points to 2.85% – the highest since April 2013.

Here, we break down what the RBA’s decision means for you and how you can control your finance amidst the high rates:

RBA cash rate history

RBA increases cash rate to 2.85%: How does this affect your mortgage?

The Reserve Bank of Australia aims to maintain the “inflation target” at 2-3% to improve the economy’s performance. During the peak of COVID-19 up to April 2022, the official cash rate remained at a record-low level of 0.10% to stimulate the economy. But this time last year, the annual rate of inflation was still at 3%.

Since then, the economy and inflation picked up quickly to a higher level than what was expected. This pushed the Bank to lift the cash rate by 25 basis points in May 2022, followed by four consecutive double hikes. Now, the cash rate has surged from 0.10% to 2.85% from May to November.

In his statement following the board meeting, RBA governor Philip Lowe said the increase would help bring the inflation rate back to the 2-3% target range: “This has been necessary to establish a more sustainable balance of demand and supply in the Australian economy to help return inflation to target.”

“Over the year to September, the CPI inflation rate was 7.3 per cent, the highest it has been in more than three decades. Global factors explain much of this high inflation, but strong domestic demand relative to the ability of the economy to meet that demand is also playing a role.”

“The Board’s priority is to return inflation to the 2–3 per cent range over time. It is seeking to do this while keeping the economy on an even keel. The path to achieving this balance remains a narrow one and it is clouded in uncertainty.

This seventh consecutive rise pushes struggling Australians further to the edge of the cliff as the higher cost of living and mortgage repayments burn holes in their pockets.

RBA’s grim cash rate prediction.

RBA increases cash rate to 2.85%: How does this affect your mortgage?

As the RBA scrambles to get higher inflation under control after it accelerated to 7.30%, borrowers and potential home buyers are in for more financial pain.

Even if economists are divided on how high rates will go, one thing is crystal clear – there are more hikes in the coming months.

The big four banks tipped that cash rates would continue climbing until 2023. CBA predicted that the RBA would reach a 3.10% cash rate before it halts hiking while NAB expected it to hike up to 3.60%.

Meanwhile, Westpac and ANZ agreed that the cash rate might even reach a whopping 3.85% before the Bank finally calms down.

A source of uncertainty with the rates is the global economy. Moreover, how Australian household spending responds to tighter financial conditions puts the Bank in the dark.

To help you better understand how the RBA determines the cash rate, It’s Simple’s managing Director, Joseph Daoud, explains it all in the video below:

RBA’s impact on home loan interest rates

Since the RBA’s cash rate affects lenders’ interest rates on home loans, especially variable rate loans, borrowers can expect these ballooning costs to push them under mortgage stress.

Based on the Bank’s monetary policy meeting in October, “The full effects of higher interest rates were yet to be felt in mortgage payments and the increases in the cash rate were close to the interest rate buffer applied when many current borrowers took out their loans.”

To give you an idea of what this increase means for borrowers, here’s an example of how the 0.25% rate increase affects a 25-year home loan with a 4.29% variable rate before the increase:

Loan amountRepayments before the increaseRepayments after the increaseIncrease in monthly repayments
$600,000$3,264$3,349$85
$700,000$3,808$3,907$99
$800,000$4,352$4,465$113
$900,000$4,896$5,023$127
$1,000,000$5,440$5,581$141

If you want to estimate how the rate rise affects your repayments, you can use our home loan repayment calculator.

Tips to keep on top of your home loan

RBA increases cash rate to 2.85%: How does this affect your mortgage?

Since the previous hikes are still yet to hurt your budget, here are some ways to help you create breathing room for your finance:

1. Check your rate

The first step is to always review your rate and assess your mortgage repayments, interest rate, loan features and loan structure to understand how your loan fits with your current situation. 

2. Ask for a lower rate

Check the rate that your lender offers to new customers, and don’t hesitate to talk and negotiate with your lender for a rate cut. If you have a good record, they may grant your request. 

3. Make extra repayments

If you can make additional payments without penalty, consider doing so. This will help lower your mortgage repayments, reduce the total interest charged on your home loan and pay off your mortgage early.

4. Considering refinancing

Review your situation and consult with a broker to check if refinancing with a different lender will help you save more. Plus, you may be qualified for a cashback offer.

5. Use offset accounts

If you have this feature on your loan, try building your offset account to lower the interest you pay and save more over the life of your loan.

6. Try splitting your loan

In uncertain times, you might consider splitting your loan into fixed and variable rates to balance the risks.

“A further increase in inflation is expected over the months ahead, with inflation now forecast to peak at around 8 per cent later this year,” said Lowe.

“The size and timing of future interest rate increases will continue to be determined by the incoming data and the Board’s assessment of the outlook for inflation and the labour market.”

“The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”

As the RBA is still on the lookout for more rate hikes to tame high inflation, keeping up to date with your mortgage and talking with a broker can help you plan and manage your finance and home loans better.

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