Changes in RBA Cash Rate and its Effect on Mortgage Rates

In its first involvement in a federal election since John Howard’s defeat in late 2007, the Reserve Bank of Australia raised the official cash rate for the first time in more than 11 years. The central bank raised its cash rate objective from the record low of 0.1% it had been stuck at since November 2020, when the Covid epidemic was at its peak. It was lifted to 0.35%, which was higher than predicted, and the RBA hinted at additional increases to come. There are several changes that were made to the current RBA cash rate. Well, the RBA board on Tuesday raised the official cash rate by 25 basis points to 0.35%, from a record low of 0.1%. The 25-basis-point increase surprised everyone. This move can also be described as at the hawkish end of the spectrum.
In a statement, RBA Governor Philip Lowe said – “the board judged that now was the right time to begin withdrawing some of the extraordinary monetary support that was put in place to help the Australian Economy during the pandemic.”

What Does An Increase In The Cash Rate Imply?

Raising interest rates, in layman’s terms, makes borrowing money more expensive. This means that consumers who have a mortgage will have greater repayments. According to UNSW Business School Professor Peter Swan, it can also contribute to higher returns on savings and superannuation, both of which accrue interest in growth. The Reserve Bank of Australia (RBA) uses interest rates to control inflation. When borrowing becomes prohibitively expensive, demand for products and services may decline, lowering total costs.

Effect Of Change On Mortgage Rates

There is a huge effect on the mortgage loan rates or the cash rate that took place in the RBA. The treasurer appoints the nine-member board, which includes Treasury Secretary Steven Kennedy, a position not held by the central banks of similar countries such as Canada.

According to these projections, headline inflation will reach 6% by the end of 2022, with core or underlying inflation at 4.75 percent. The latter came in at 3.7 percent in March. Another increase of 40 basis points to 0.75 percent at the board meeting next month, according to some reports, appears to be a real possibility.

Borrowers will be punished by the rate hike, but depositors will rejoice after years of little or no return. Commercial banks will pass on Tuesday’s raise to lending and deposit rates, but the extent of the increase and the speed with which it was implemented will undoubtedly be scrutinized, especially because more hikes are expected soon.

Will Homeowners Get Punished With This Cash Rate Hike?

As lenders compete to give the most competitive rates on the market, mortgage loan rates are strongly linked to the cash rate. The lower the cash rate, the lower home loan rates will likely go. If you have a variable home loan, your repayments will almost certainly increase if the RBA raises interest rates. According to some figures, variable-rate mortgages account for 70% of all mortgages in Australia. As a result, homeowners may experience a rise in their mortgage interest rate, as well as an increase in the amount of money they must set aside to service their loan.

Therefore, in this way, there is a possibility that the homeowners may get punished with this sudden hike in the cash rate.

Can This 0.25% Hike Affect You?

0.25% can be considered a negligible hike. But if we analyze this hike for a long tenure, the story is totally different. If we analyze the 30-year P+I loan repayment plan with respect to the loan amount using the home loan repayment calculator, the data is as follows-

Loan AmountMonthly Repayment At 2.75%Monthly Repayment At 3%Difference In Monthly Repayments
20000$816$843$27$
40000$1633$1686$53$
60000$2449$2530$81$
80000$3266$3373$107$