How does the RBA cash rate affect home loan repayments?

After 18 months of record-low interest rates, Australians experienced the first cash rate hike in over 11 years earlier this month.

With rising interest rates forecasted to continue throughout 2022, homeowners and prospective home buyers will both be affected by the ongoing changes.

In this article, we take a look at how the cash rate affects mortgage repayments, what the Reserve Bank of Australia (RBA) is and how the cash rate is determined each month.

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How does the cash rate affect home loan interest rates and repayments?

The cash rate is decided each month by the RBA, Australia’s central bank. Its role is to set and implement monetary policy that ensures the Australian economy remains stable and healthy.

The cash rate is described by the RBA as ‘the interest rate on unsecured overnight loans between banks’. It affects home loan interest rates because it is essentially the cost of borrowing money for commercial banks from the Reserve Bank and other institutional lenders.

Whether you’re a homeowner currently paying off your mortgage or an interested buyer, it’s important to keep up-to-date with changes in the cash rate as these changes influence the rates offered by mortgage lenders.

Changes to the cash rate are typically reflected in lenders’ interest rates. In March 2020 when COVID-19 began to affect Australia’s economy and the cash rate dropped twice in a month, we saw lenders reduce their interest rates to remain competitive.

As the cash rate has started to rise after a record low 0.10%, lenders have begun increasing their rates.

While lenders aren’t obligated to keep pace with the cash rate, this is often the case.

When interest rates drop, it may open opportunities for home buyers to take out a home loan and buy a property. If you’re a homeowner on a variable rate home loan, you’ll benefit from lower repayment amounts.

However, when rates rise, home buyers may find it more difficult to buy if housing prices are still rising, as the increase in interest rates will affect their borrowing power. For homeowners on a variable interest rate, this means an increase in home loan repayments.

If you’re on a fixed rate home loan, your home loan repayments will remain the same until the end of your fixed term. Afterwards, your interest rate will usually revert to your lender’s standard variable interest rate.

Depending on whether the cash rate and your lender’s rates have increased or decreased since you first fixed your rate, your repayments will change accordingly.

Here’s how a small rate increase can impact how much you owe on your repayments:

Calculate how much more you’ll owe if your interest rate rises using our repayments calculator.

What impact will rate rises have on how much people can borrow?

As interest rates continue to rise this year, the amount that borrowers will be able to borrow from lenders could decrease. This is because the higher the interest rate, the lower your borrowing capacity becomes, so more prospective property buyers could struggle to secure a home loan.

The silver lining for prospective home buyers is that this rate increase could slow down the growth of dwelling prices to match dwindling demand.

How high will the cash rate rise in 2022?

Following news of a skyrocketing 5.1% inflation rate in Australia, the first rate hike in over 11 years occurred in May.

Historically, the cash rate has moved in 0.25% increments, so we may continue to see this trend in the coming months. However, both smaller and larger incremental moves are possible and as we saw in March 2020, a cash rate change is not limited to once per month.

The cash rate is expected to reach 1.5% by mid-2023 (up 1.40% from 0.10% at the beginning of 2022).

What can you do to make sure you’re still getting a competitive rate?

It may be worthwhile reviewing your rate with a Home Loan Specialist to ensure you’re still getting a fair deal on your home loan.

If you haven’t reviewed your home loan in a while, there’s a chance you could be paying loyalty tax. Loyalty tax occurs when a lender increases their interest rate for existing customers and refrains from passing on rate cuts that are offered to new customers.

Book an appointment with an expert to ensure you still have a competitive rate on your home loan.

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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.