Everything homeowners need to know about the cash rate hike

How much more will you pay?

RateCity has crunched the numbers on home loan repayments for a homeowner with a 25-year $500,000 mortgage paying the average owner-occupier variable rate for existing customers in April 2022 of 2.89%, according to RBA data.

Assuming the lender passed on both hikes in full, with the cash rate now at 0.85% this would mean their interest rate has increased to 3.61% (May hike of 25 basis points, June hike of 50 basis points).

Their monthly home loan repayments would increase from $2,335 in April to $2,532 after the June hike. This is an extra monthly repayment of $197 after this hike.

Source: RateCity.com.au, RBA Interest Rates (Avg Apr-22). Based on 25-year, $500k mortgage. Does not factor in fees.

What does the future look like for interest rates in Australia?

According to forecasting from the big four banks, homeowners may need to brace themselves for multiple cash rate hikes over the next few years. Here is how high the big banks have predicted the cash rate could climb:

• CommBank – 1.60% cash rate by February 2023
• Westpac – 2.00% cash rate by May 2023
• ANZ – 2.25% cash rate by May 2023
• NAB – 2.60% cash rate by August 2024

It’s important to remember that these are simply just predictions based on the current modelling and may be subject to change. What this means for homeowners is that interest rates on home loans may increase by between 1.25 – 2.50 percentage points between 2022-2024.

So, for a homeowner that was paying a variable rate of 2.89% in April, they could see their rates rise to 5.39% by August 2024.

And on that same hypothetical 25-year, $500,000 home loan, assuming your lender passed on every single rate hike, your monthly repayments would become $3,038 per month. This is an increase of $695 to your monthly mortgage repayments over a two-year window, assuming this forecasting were to come to fruition.

Why is the Reserve Bank hiking interest rates now?

The RBA looks at an extensive range of macroeconomic factors when determining how to set the cash rate at its board meeting each first Tuesday of the month (excluding January). Regarding the 2022 cash rate increases, this has mainly been driven by higher inflation levels.

RBA Governor Philip Lowe had noted for years that they were looking for inflation levels to reach a target of around 2-3% growth before they would consider lifting rates, so this has been a considerably influential factor.

According to AMP Chief Economist, Shane Oliver, what really changed in May 2022 to push the RBA’s hand is that “the jobs market, with just 4% unemployment and inflation at 5.1% year-on-year… have been far stronger than the RBA expected…”

As annual inflation has climbed over 5.1% - the highest level seen since the 1990s – the RBA is moving to try and cool inflation. And this is not just occurring in Australia, with central banks across the globe hiking their benchmark rates to curb rising inflation, including the US Federal Reserve and the Bank of England.

By raising interest rates, the theory is that you can help to slow down an economy. By making credit more expensive, you will have less purchasing power, encouraging Australians to spend less and save more. For example, if you were considering purchasing a new car this year, higher interest rates on car loans may force you to hold off and save your cash.

When borrowing money becomes more expensive, you will see demand for goods and services lower. While we may not see prices go down right away, particularly in a time of serious cost-of-living pressures, the rate of inflation should decline – in theory.

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