Reserve Bank shocks Australia increasing the cash rate to 0.85 per cent with another six rate rises to come this year in a huge blow to EVERY homeowner – so what does it mean for YOUR mortgage?
- Reserve Bank of Australia hikes the cash rate by 0.50 per cent to 0.85 per cent
- Thousands of mortgage holders will need to pay more on their repayments
- All of Australia’s major banks are all expected to pass on the rate rise in full
The Reserve Bank of Australia has hiked the cash rate to 0.85 per cent on Tuesday, meaning mortgage holders will be forced to shell out even more on their monthly repayments as the cost of living soars.
The 0.5 per cent jump is just the second rate rise in 11 years after the central bank moved from the record low setting of 0.1 per cent in May to curb spiraling inflation.
If banks pass on the increase in full, Australians paying off a $600,000 home at a variable rate will now have to handover about $127 a month more with their repayments going from $2,890 to $3,017.
The Big Four financial institutions including the Commonwealth Bank, ANZ, Westpac and NAB all raised interest rates in line with the RBA last month and are expected to do the same again.
Further rapid-fire rate hikes are widely predicted to follow every month until at least the end of the year.
Economists had widely predicted the cash rate to lift by 0.25 or 0.40 per cent with the shock move indicating inflation could be even worse than first thought.
The Reserve Bank of Australia has hiked the cash rate to 0.75 per cent on Tuesday, meaning mortgage holders will be forced to shell out even more on their monthly repayments as the cost of living soars
How much more will YOU have to pay on your home loan?
$500,000: Monthly repayments to rise by $133 from $2,410 to $2,543
$600,000: Monthly repayments to rise by $159 from $2,890 to $3,049
$750,000: Monthly repayments to rise by $199 from $3,610 to $3,809
$1million: Monthly repayments to rise by $265 from $4,810 to $5,075
Data based on variable rate increasing from 3.11 per cent to 3.61 per cent
RBA Governor Philip Lowe now has no other way to get cost of living pressures under control after the Australian government handed out more than one third of a trillion dollars in stimulus during the Covid pandemic in 2020 and 2021.
The generous spending coupled with the record low interest rates to spur on economic growth, has seen inflation in the year to March surge to 5.1 per cent – the fastest rise 2001.
Aussie families are feeling the pinch with some fruit and vegetables up 50 per cent since the start of the year, petrol prices over $2 a litre and wholesale energy bills skyrocketing by 141 per cent.
Upward pressure on prices has also been compounded by several other global and domestic factors.
Western powers imposed sanctions on major oil producer Russia, after Vladimir Putin’s force invaded Ukraine in February sending the price soaring amid a supply shortfall.
If banks pass on the increase in full, Australians paying off a $600,000 home at a variable rate will now have to handover about $127 a month more
Why do interest rates need to rise?
The most basic principle of economics is supply and demand.
When supply outstrips demand prices will fall, but when demand is great and supply is scarce the cost of products will rise.
That’s why something rare and in demand like gold is expensive, whereas something bountiful such as potatoes is relatively cheap.
This rule also applies to the money itself.
Huge Australian government stimulus during Covid totalling more than one third of a trillion dollars – at a time of record low interest rates – has meant there’s more money competing for the same amount of goods and services.
The extra supply of cash is what’s now driving up prices (along with a range of other global factors including the war in Ukraine and supply chain chaos in the wake of the pandemic).
But by raising the cash rate and making money harder to borrow, it should limit the supply of money and help bring down prices.
Cold comfort to those forced to shell out more on their mortgage.
At the same time, supply chain chaos still lingering on the heels of the Covid pandemic is adding to the problem.
For Australia, the recent floods and bitterly cold weather has also impacted on food production and energy demands.
The RBA hopes that tightening the money supply will help bring down some of these costs.
‘Central banks across the world are struggling to get on top of inflation, and the RBA does not want to be one of them,’ RateCity research director Sally Tindall said.
She warns the cash rate by Christmas is likely to lift to about 1.75 per cent, leaving someone paying off a $600,000 home forced to cough up an extra $532 a month.
‘Don’t just assume you can take these hikes in your stride. Work out what your repayments will look like by Christmas next year and make sure that number fits into your budget,’ Ms Tindall said.
‘A lot of people think just because rates are on the rise, it’s not a good time to renegotiate their home loan. But in many cases, that’s just not true.
‘Banks still need to keep new business rolling through the door, and they’re typically doing it by offering sharper discounts to refinancers willing to switch lenders,’ she said.
The Big Four financial institutions including the Commonwealth Bank, ANZ, Westpac and NAB all raised interest rates in line with the RBA last month and are expected to do the same again
How much you could be paying on your loan in 2023?
How much extra you could be paying by Christmas?
$500,000: Monthly repayments will rise by $442
$600,000: Monthly repayments will rise by $532
$750,000: Monthly repayments will rise by $665
$1,000,000: Monthly repayments will rise by $885
Data is based the Reserve Bank of Australia raising the cash rate to 1.75 per cent by the end of 2022, inline with expectations.
How much extra you could be paying by the end of 2023?
$500,000: Monthly repayments will rise by $652
$600,000: Monthly repayments will rise by $782
$750,000: Monthly repayments will rise by $977
$1,000,000: Monthly repayments will rise by $1303
Data based on the Reserve Bank of Australia raising the cash rate to 2.50 per cent by the end of 2023, inline with expectations.