How the RBA cash rate impacts your mortgage

Find out how changes to the cash rate could affect
your home loan

04 May 2022|3 minute read

modern australian home

After close to 2 years of rock-bottom interest rates, rate rises are on the horizon. The Reserve Bank of Australia (RBA) is in charge of dictating the cash rate which tends to directly affect mortgage interest rates.

Now that the RBA has increased the cash rate, banks are starting to lift interest rates on home loans, credit products and savings accounts. So, it’s important to stay informed and be prepared.

In this article, we explain what the RBA cash rate is, why it is so closely tied to home loan interest rates, what influences the cash rate, what happens when it is increased and more.

How your mortgage repayments could look following a rate hike

As the cash rate continues to increase, your home loan repayments will likely increase due to probably interest rate rises. It’s important to budget and be prepared for these possible increases.

Here is an example of how a higher interest rate could affect your monthly repayments:

Loan amount Interest rate increase Annual repayment increase
$400,000 +0.25% +$624
$600,000 +0.25% +$948
$800,000 +0.25% +$1,260

Try out Aussie’s mortgage repayments calculator to see what your home loan repayments could look like with an interest rate increase.

What is the cash rate and why does it affect home loan interest rates?

The official cash rate (OCR) is the interest rate placed on overnight loans between banks. It is determined on the first Tuesday of each month (except January) by the RBA.

The RBA is Australia’s central bank that is responsible for maintaining the country’s economic health. Their adjustments to the cash rate are made with the best interest of Australians and the economy in mind.

Since the cash rate is the interest rate charged on loans exchanged between banks and lenders, it tends to impact how much financial products cost.

Lenders will charge interest rates on their loans and credit products to:

  • Account for their own borrowing costs (i.e. the cash rate interest)

  • Make profit

  • Cover business costs.

If the cash rate is increased, the cost of borrowing money increases for these financial institutions.

So, when the cash rate increases, it’s common for lenders to increase their interest rates too – and vice versa.

Higher interest rates aren’t great for borrowers, but they can be good for those saving up money.

What influences the cash rate?

The RBA’s decision to raise or lower the cash rate – and by how many basis points – is determined by a number of factors including:

  • Inflation levels

  • Unemployment levels

  • The cost of living

  • The property market

  • Consumer confidence

  • Business confidence

  • How the Australian dollar is performing.

Do banks only change interest rates based on movements in the cash rate?

While the official cash rate is the main factor influencing the interest rates lenders attach to their loans, credit cards and saving products, there are other factors.

Lenders are allowed to increase or decrease their rates independent of the cash rate. A lender may change their interest rates for some of these other reasons:

  • To remain competitive (e.g. a bank may lower interest rates to beat a competitor)

  • To account for overhead business costs – banks are impacted by the rising cost of living too

  • To increase profits

  • To launch a special promotion or deal on a loan product.

What happens when the RBA increases the cash rate?

It’s rare for a cash rate increase to blindside banks – they’re usually prepared and ready to raise their rates.

Borrowers can expect higher interest rates, but potential interest earnings could encourage good saving habits.

Lenders may warn their customers about looming rate rises, but the increases could also go into effect almost instantly.

While higher interest rates will increase monthly costs for many Australians with debt, the increases are unlikely to be drastic. It’s in the best interests of banks (and the RBA) to make sure their customers can afford their repayments.

Additionally, when you applied for your home loan, the lender will have calculated an interest rate buffer. Rate buffers help lenders determine the ability of a borrower to meet their repayment obligations if interest rates increase.

The Australian Prudential Regulation Authority (APRA) increased the minimum interest rate buffer from 2.5% to 3.0% in 2021. This was done to reduce the number of heavily indebted borrowers who are more likely to default on their loan and experience mortgage stress.

I have a fixed rate home loan – will I be affected by an interest rate rise?

No, throughout the duration of your fixed rate period, your interest rate remains the same.

However, if you are nearing the end of your fixed period, it’s a good idea to start preparing for more expensive home loan repayments.

On the other hand, borrowers with variable rate mortgages will probably already be familiar with interest rate fluctuations. These borrowers will likely be affected by an interest rate hike.

Is it time to review your home loan? Book an appointment with your local Aussie Broker for more information.

Book a chat with an Aussie Broker

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