The Reserve Bank of Australia (RBA) raised their cash rate on 7 November by 0.25%, after leaving it on hold for the past four months. Since May 2022, the cash rate has increased by 4.25%, from 0.10% to 4.35%.
This has had a knock-on effect on variable home loan interest rates, which look set to remain high for months to come. Several of the big banks already lifted their home loan rates last week, on top of this rate hike.
It’s understandable that homeowners are anxious about their home loan repayments. We've outlined everything you need to know about the latest RBA cash rate decision and what it means for your mortgage in the guide below.
The current cash rate is still 4.35% - up from 0.1% in the past 18 months.
Lenders have gradually raised their interest rates since last month, indicating that they’re preparing for more rate rises.
A rate rise means that those paying variable rate mortgages will likely experience costlier repayments.
Whether you’re buying or refinancing, Compare Club can help you find the best rate for your needs from a panel of over 50 mortgage lenders.
Will interest rates increase further for homeowners in 2023?
In their tenth rate announcement for 2023, the RBA has indicated that the official cash rate target may rise further:
"The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome."^
Banks and other lenders are clearly taking these indications seriously.
Compare Club broker Sophie Matthews recommends that anyone facing the end of their low fixed interest rate term, consider refinancing their home loan. She also suggests you "act fast to maximise your savings". If you've already moved out of your low interest rate period, Sophie suggests that:
"There are strategies your household can employ, such as paying extra into your mortgage if you can afford it, or speaking to your lender about renegotiating your loan. "But the best thing any homeowner can do is speak to a mortgage broker or a financial professional. A few phone calls could save you thousands of dollars in home loan repayments." "The same goes for anybody looking to buy a new home right now. The housing market is showing signs of rebounding in some locations, but buyers need to know their local market. Some regions have slowed down but that's not the case for the whole of Australia."
What time is the RBA cash rate decision?
The RBA meets on the first Tuesday of each month to decide on monetary policy. The board announces the new cash rate at 2.30pm that day, with any changes they make coming into effect the next day.
Why do interest rates go up and down?
The Reserve Bank of Australia controls the national interest rate (cash rate) to ensure we have a stable currency and to avoid high inflation which generally drives up living costs.
The RBA examines the growth of the Australian economy and decides whether to slow it down by raising the cash rate or speed it up by lowering the cash rate.
Several factors influence the rise and fall of interest rates, including:
Employment and wages growth - If employment levels are low, the RBA will be more inclined to lower the cash rate as a means of stimulating investment and creating more jobs. Similarly, slow wages growth can indicate slow economic growth and make it more likely that the RBA will keep the cash rate where it is.
Inflation - One of the RBA’s ongoing goals is to keep the inflation rate between the 2 and 3 per cent target range. If the rate of actual inflation exceeds 3%, the RBA is inclined to increase interest rates to help consumers retain their level of buying power. The current rate of inflation is 5.4%%, and it is on the way down.
Growth of the Australian economy - GDP represents the value of all goods and services produced in Australia. If it falls too low, the RBA may lower the official cash rate target to help stimulate the economy (if interest rates are lower, more people will buy houses, open businesses, make investments, etc.)
How does the Reserve Bank of Australia’s cash rate announcement affect interest rates?
The official cash rate affects how expensive it is for banks and other financial institutions to borrow money from one another in the overnight money markets.
This exchange of short term ‘overnight funds’ is how lenders ensure they can meet their liquidity needs each day.
Simply, if it's more expensive for lenders to borrow money, they can pass this expense on to consumers by increasing the interest rates on their products (such as home loans).
How do interest rate changes affect me if I’m looking to buy property?
If the official cash rate rises, and lenders respond by lifting their mortgage rates, borrowing money costs you more. This affects the interest rate you are charged on the money you've borrowed as well.
A higher interest rate means that your variable rate mortgage will have higher monthly repayments and, consequently, will take longer for you to pay off.
With more expected cash rate rises looming (and lenders raising their rates in response), Sophie says:
“It really is a market where it pays to take action now. For example, a homeowner with a $600k variable rate mortgage would have seen their repayment rise by an average of $1,474 per month since the rate rises began in May 2022.*"
"That's an extra $17,685 a year, so for every month a mortgage holder delays reviewing their mortgage, the they're paying more in 'loyalty tax' to their lender.*"
How do interest rate changes affect me if I already have a mortgage?
If you’re already paying off a variable rate mortgage, then any change the lender makes to your loan’s interest rate affects the cost of your repayments.
So, if the RBA increases the official cash rate, you will likely pay more for your mortgage each month.
However, if you're still paying off a fixed rate portion of your mortgage, your repayments won’t be affected since you locked in your rate.
But once your fixed rate period ends, you'll have to pay whatever variable rate the lender decides. This known as your 'revert rate', and it's usually higher than the bank's variable interest rate.
If you currently have a mortgage and are worried about the impact of a rate rise on your repayments, it's worth thinking about refinancing to a lower rate now.
Sophie says, “We've been working with homeowners to review their home loans and that message seems to be sinking in, as we've seen record numbers of refinancing inquiries already this year."
How much more will I pay if interest rates go up?
The answer really depends on:
The decision from the RBA.
How your lender adjusts their interest rate in response.
Keep in mind, the RBA’s decision isn't the only factor lenders look at when adjusting their interest rates.
You can use Compare Club's refinancing calculator to work out how much you could save in monthly payments if you refinance.
How can I make sure I’m on the best home loan rate for me?
Even without a predicted rate rise on the horizon, it’s a good idea to periodically reassess your mortgage to see whether you can get a better rate.
Sophie highlights some good news: "There are still some competitive fixed term loans available when you look beyond the big four banks, but there's no telling how long they'll remain on offer."
"There's also some lower variable rate options too, so mortgage holders and purchasers have options when reviewing their loan through a broker. You may not have to put up with a higher rate just because your bank says so."
It’s also a good idea to negotiate with your current lender to see what rate they're willing to offer to keep you.
Be careful not to agree to the first offer they make, as while it might be lower, it may not be the best deal you can get.
A quick and easy way to see if you can get a better offer, is to use a service like Compare Club which compares lenders to find you a better option.
By comparing home loans, you can get ahead of the recent rate hikes and potentially switch to a better deal.
Get started with Compare Club today and see if you can get a better deal on your home loan.Compare & Save
The information contained on this web page is of general nature only and has been prepared without taking into consideration your objectives, needs and financial situation. As such, it is important that you consider the appropriateness of the advice and the relevant product disclosure statement (PDS) before proceeding. Any opinions expressed within an article are those of the author and do not specifically reflect the views of Compare Club Australia Pty Ltd. ^RBA statement November 2023 *Numbers are based on an average mortgage of $600,000 according to the Lending indicators from the Australian Bureau of Statistics with principal and interest repayments over a 25 year loan term, the average interest rate on Compare Club's panel of over 50 lenders, and the cumulative RBA cash rate decisions announced since May 2022 to date.