At its final board meeting for 2022, the Reserve Bank of Australia (RBA) increased the official cash rate again by 25 basis points to 3.10% – the highest rate in a decade. How does the rate hike affect homeowners and potential borrowers? When will the rate rise end?
Here, we run down what happened to Australia’s cash rate in 2022 and what you can do to minimise the impact of rate hikes and protect your finance.
What is the cash rate?
Every first Tuesday of the month (except January), the RBA meets to set the country’s official cash rate. The cash rate influences almost all financial transactions, such as home loans, the property market and your savings.
In simpler terms, the cash rate is the interest rate that banks and lenders pay on the money they borrow from the money markets. Meanwhile, the interest rate is the amount banks and lenders charge borrowers.
Since the cash rate affects the borrowing cost, banks can pass a rate increase or decrease to borrowers through home loan interest rates.
RBA cash rate history
After cutting the cash rate since 2011, the RBA has made eight consecutive rate hikes this 2022. Several factors affect the movement of the cash rate, such as inflation, employment and unemployment rates and economic growth.
Particularly, the Bank has been on the lookout for inflation. In its November announcement, RBA governor, Philip Lowe, stated that the central forecast for inflation may “reach 8 per cent by the end of 2022 (revised up from 7¾ per cent previously) and for underlying inflation to be 6½ per cent (revised up from 6 per cent previously).”
To maintain the “inflation target” at 2-3% after the pandemic boom, the Bank started to increase the cash rate by 25 basis points starting in May 2022. Now, the cash rate has gone from a record-low level of 0.10% to 3.10% this December 2022.
Based on the latest Australian Bureau of Statistics (ABS) figures, the Consumer Price Index (CPI) indicator fell from 7.1% to 6.9% in October 2022. While the rate slightly eased, it’s quite unclear if this will be enough to let the RBA pull the breaks from lifting the rates next year.
In his statement following the board meeting, Lowe claimed, “Returning inflation to target requires a more sustainable balance between demand and supply.”
“There has been a substantial cumulative increase in interest rates since May. This has been necessary to ensure that the current period of high inflation is only temporary,”
“High inflation damages our economy and makes life more difficult for people. The Board’s priority is to re-establish low inflation and return inflation to the 2–3 per cent range over time.”
What does the rate hike mean for borrowers?
The compounding interests from the previous months leave homeowners and potential borrowers on the edge of their seats wondering how high home loan interest rates will be.
As home loan rates increase with the cash rate, especially variable rate loans, the higher the cash rate is, the higher your mortgage will be.
“The Board recognises that monetary policy operates with a lag and that the full effect of the increase in interest rates is yet to be felt in mortgage payments,” said Lowe.
To give you an idea about how the RBA’s decision affects your loan, here’s an example of how the 0.25% hike affects a 25-year home loan with a 4.57% variable rate before the increase:
|Loan amount||Repayments before the increase||Repayments after the increase||Increase in monthly repayments|
To know how the rate hikes will affect your repayments, you can use our home loan repayment calculator.
Aside from higher interest rates, potential borrowers may also see their borrowing capacity dip due to tighter borrowing regulations. In 2021, the Australian Prudential Regulation Authority (APRA) increased the minimum interest rate buffer from 2.5% to 3% to counter home lending risks.
This means that even if the interest rate is 4.50%, lenders will assess your capability to service a loan at 7.50%.
To help you combat this tough time, It’s Simple’s managing director, Joseph Daoud, shares his 7 expert tips to help you maximise your borrowing power:
How can you beat the high interest rates?
The lagging effects of the rate hikes since May can hurt your budget and push you under mortgage stress unless you know your options. To help you avoid financial strain, here are some tips to help you manage and protect your home loan:
Review your rate
Check your rate, repayments, loan features and loan structure to assess how your loan affects your situation and have a clearer idea of your available alternatives.
Negotiate for a lower rate
There’s a high chance that you may be paying more compared to new customers. If you find yourself overpaying, approach your lender, and don’t hesitate to ask for a lower rate.
Compare and refinance to a better rate or features
It’s a competitive market, so it pays to compare your options and find a better lender. Consult with a broker to check if refinancing your home loan will help you save more and take advantage of cashback offers.
Make extra repayments
Make extra repayments if you can. This can reduce the total interest charged on your home loan and pay off your mortgage early.
Take advantage of offset accounts
Build on your offset account to decrease the overall interest you pay and save more over the life of your loan.
How does the high interest rate affect house prices?
With the cash rate affecting the interest rate charged by lenders, a higher rate makes taking out a mortgage less appealing. This pushes house demands lower, so property prices soften in the market.
Based on CoreLogic, Australia’s national Home Value Index (HVI) declined in November by -1.0% over the month to -7.0%. This is approximately -$53,400 less than the peak value in April 2022.
While the pace of decline eased from -1.6% in August, CoreLogic’s research director, Tim Lawless, noted, “There is still the possibility that the pace of declines could reaccelerate, especially if the current rate hiking cycle persists longer than expected,”
“Next year will be a particular test of serviceability and housing market stability, as the record-low fixed rate terms secured in 2021 start to expire.”
What will happen to interest rates in 2023?
With another cash rate increase this December 2022, many Australians will struggle to keep up with higher interest rates and cost of living in the coming months.
“We know these are harsh and heavy times for Australian households: on top of climbing grocery and energy bills, the average family now has to find around $500 more each month on mortgage repayments since rates started rising before the election,” Treasurer Jim Chalmers said.
With inflation still light years away from the target range, the Bank hints there may be more interest rate rises on the cards: “The Board expects to increase interest rates further over the period ahead, but it is not on a pre-set course. It is closely monitoring the global economy, household spending and wage and price-setting behaviour,”
“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.”
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