The Reserve Bank of Australia has increased the official cash rate again by 25 basis points to 2.60% – the sixth consecutive hike in 2022, and the highest rate in 9 years. Buckle your belts because forecasts for the RBA’s peak rate just keep rising.
Here, we unfold everything you need to know about what the rate hike means for you and your mortgage repayments.
What will interest rates be in 2023?
From the historic low level of 0.1% during the peak of the pandemic, the cash rate has increased since May 2022. While raising debates among experts, this is the RBA’s attempt to tame inflation, which reached an all-time high of 7% in July.
In his statement following the announcement, RBA governor Philip Lowe said that “today’s further increase in interest rates will help achieve a more sustainable balance of demand and supply in the Australian economy.”
“This is necessary to bring inflation back down. The Board expects to increase interest rates further over the period ahead.”
Meanwhile, the Australian Bureau of Statistics (ABS) revealed that annual inflation fell to 6.8% in August but was still well beyond the RBA’s 2-3% target range. This slight fall was mainly because of the decrease in automotive fuel prices.
Despite the slight drop, the RBA is still scrambling to get high inflation under control as it struggles to balance out consumer spending and the economy. Lowe tipped that interest rate hikes are far from over: “I think we’ll cycle around some number between 2.5 and 3.5 [per cent].”
While the RBA finally hits pause from the double hikes, Lowe still warned that inflation and interest rates will likely get worse before they get better.
“A further increase in inflation is expected over the months ahead, before inflation then declines back towards the 2–3 per cent range.”
What does the rate hike mean for borrowers?
The cash rate directly affects the interest rates banks and lenders place on home loans. When the official cash rate increases, borrowing becomes more expensive. So, if you’re an existing borrower on a variable rate or your fixed rate is coming to an end, expect your repayments to climb higher unless the RBA hits the breaks or you fix your rate.
Here’s an example of how the 0.25% hike affects a 25-year home loan with a 5.24% variable rate before the increase:
| Loan amount | Repayments before the increase | Repayments after the increase | Increase in monthly repayments |
| $400,000 | $2,395 | $2,454 | $59 |
| $600,000 | $3,592 | $3,681 | $89 |
| $800,000 | $4,790 | $4,908 | $118 |
| $1,000,000 | $5,987 | $6,135 | $148 |
The previous hikes are still yet to hurt your bank account, so compounding these +0.25%s and +0.50%s since May can push you to the brink as you keep up with rising repayments and cost of living. Unless you manage your loans right, you may be in danger of facing mortgage stress.
Home loan interest rates are set at 4% to 5% and are on track to further rise as the cash rate increases. Now is a crucial time to review your loan, negotiate with your lender or speak to your broker to ensure you’re not overpaying your loan or missing out on a more competitive rate.
If you want to know how your repayments will change, you can use our home loan repayment calculator. You can also read more about the 6 expert tips to help you beat the high interest rate.
For potential borrowers, higher interest rates increase borrowing costs and shrink your borrowing power. This means you may need to take out a smaller loan or wait until you saved up enough deposit as lending policies tighten.
Based on the latest lending indicators from the ABS, the new loan commitments for housing (owner-occupiers and investors) fell by 3.4% in August 2022 after declining by 8.5% in July.
Source: ABS
However, for owner-occupier first home buyers, new home lending went up by 10.4% in August – the largest hike since August 2020.
Katherine Keenan, ABS head of Finance and Wealth noted, “Anecdotal feedback attributed some of the August owner-occupier first home buyer increased demand to the 2022-23 First Home Guarantee.”
How does the high interest rate affect the property market?
If you’re planning to buy a home, here’s something you can look forward to. The Australian housing industry continues to see a market correction. As rates successively go higher, property prices continue to soften across Australia as multiple rate hikes weaken housing demand.
Based on CoreLogic’s August data, the national home value fell by 1.6% in August 2022 – the steepest monthly decline in over 39 years. Sydney led the downturn with a decrease of 2.3%, a 7.4% fall from its January peak while Melbourne fell by 1.2%.
Meanwhile, the most recent data showed that property prices fell by 1.4% in September 2022 as Sydney and Melbourne recorded milder drops of 1.8% and 1.1% (respectively) after significant price falls in the past months. Defying the trend was Darwin as it remains the only capital city where housing values haven’t gone down.
Sydney still leads the decline as housing values are now 9.0% below the city’s January 2022 peak – this is a price drop of $104,300 from the median value.
Source: CoreLogic
While the housing downturn eased this month, it can be largely attributed to public holidays disrupting auction activities in Australia.
In fact, the downturn trend in property values may be starting to dwindle, but experts hinted that it’s not yet the end of a gloomy market. The projected interest rate increases will likely drive home prices further down.
Some economists, including Lowe, are hinting that property prices may reasonably drop by 10% to 15% in the following months and even more. Of course, this still depends on how high rates will go.
As stated by Tim Lawless, CoreLogic’s research director, “It’s possible we have seen the initial shock of a rapid rise in interest rates pass through the market and most borrowers and prospective home buyers have now ‘priced in’ further rate hikes.”
“However, if interest rates continue to rise as rapidly as they have since May, we could see the rate of decline in housing values accelerate once again.”
Aside from property prices plummeting, choices are still up for home buyers as auction volumes remain firm: “Across the combined capitals, total advertised stock levels are tracking 7% higher than the same time last year, but are still -15% below the previous five-year average.”
Source: CoreLogic
“In some of the weaker cities, total advertised stock levels have risen to above average levels, including Sydney (1.1% above the previous five-year average), Melbourne (+9.7%) and Hobart (+9.0%).”
With the arrows pointing towards higher interest rates and possibly lower property values, it’s important to check your loan and options. Understanding how the RBA’s cash rate affects your interest rates will help you ensure you still get the best deal in the market.
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