How will the 0.5% cash rate increase affect your mortgage?

Find out how a rate rise will affect your mortgage with our
Rate Rise Calculator

12 July 2022|3 minute read

modern Australian home and front yard

In case you missed it, the Reserve Bank of Australia (RBA) has increased the cash rate yet again. The cash rate has risen by 0.50% basis points – going from 0.85% to 1.35%.

Given that the cash rate was at a historical low of 0.10% in April, these increases may feel overwhelming for some borrowers.

In this article we’ll explain why the rate is increasing and what predictions experts have for the coming month. We’ll also share what it means for new and existing borrowers and how Aussie’s Rate Rise Calculator could help you manage your rising home loan repayments.

Why is the cash rate increasing?

The cash rate directly influences the interest rates banks and lenders place on their home loans and credit products. So when the cash rate goes up, the cost of borrowing increases for lenders and so they typically pass this expense on to borrowers in the form of higher interest rates.

The RBA Australia’s central bank, and it plays an important role in maintaining the economy. Early on during the pandemic, the RBA began reducing the cash rate until it hit a low of 0.10%.

This was done in an attempt to help Aussie households with the financial strain caused by the pandemic.

While this was welcomed by most borrowers, the low cash rate contributed to rising inflation levels – causing the cost of basic household expenses to skyrocket recently.

The RBA’s decision to lift the cash rate is primarily to manage the growth of inflation and its effects. Additionally, Australia’s post-pandemic economic recovery made the increases more viable.

In many respects, the cash rate is actually ‘normalising’. While the 0.10% cash rate meant that borrowers enjoyed record low home loan interest rates, this was never going to be a long term situation.

Will there be more rate hikes in the next 6 months?

Yes, experts are predicting further rate hikes in the coming months. There are a number of different cash rate forecasts.

For example, the Commonwealth Bank’s economics team lifted its cash rate target to 2.10% by the end of 20221. National Australia Bank has made the same prediction2. Westpac predicts that the cash rate will rise to 2.35% by the end of the year3.

Economist Ben Udy has predicted that the cash rate could rise to 2.85% by the end of 20223.

But the even more extreme cash rate predictions (e.g. 4.0% by the end of 2022) seem particularly unlikely. RBA governor, Phil Lowe suggested that such dramatic increases would ‘affect confidence and [...] slow the economy quite a lot’4.

At the end of the day, we can’t accurately predict how the cash rate will change. It may depend on the state of inflation and other economic indicators.

What does the rate hike mean for home loan borrowers?

Most of the time, an increase in the cash rate results in higher interest rates for borrowers on home loans, as well as other credit products (e.g. credit cards, car loans, personal loans).

Higher mortgage interest rates means that your monthly repayment amount will increase if you’re on a variable interest rate. If you have a fixed rate home loan, your interest rate won’t change and your repayments will remain the same until the end of the fixed term (or if you refinance).

For prospective homeowners, higher interest rates could make it harder to get a home loan. This is because your borrowing power decreases as your loan becomes more expensive to service.

New borrowers may have to take out smaller loans or wait until they have saved up a larger deposit.

For existing borrowers, your home loan repayments will likely increase, potentially becoming more difficult to manage. Borrowers facing mortgage stress might want to consider reviewing their loan or speaking to their lender. Read our article on what you can do if you’re struggling with your mortgage repayments here.

How Aussie’s Rate Rise Calculator can help you?

Aussie has recently introduced a Rate Rise Calculator to help borrowers figure out how their home loan repayments could change with a rate rise.

This has been designed so that you can be better prepared for future interest rate increases. You’ll get a clearer insight into how much your repayments could change, how much more interest you’ll pay and whether you can comfortably manage your repayments with these changes.

Unsure whether you can handle further rate rises or keen to review your home loan? Book an appointment today to find out how you could stay on top of rate changes.

Book a chat with an Aussie Broker

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