does-the-cash-right-rise-affect-home-loan-interest-rates-for-aussie-homeowners does-the-cash-right-rise-affect-home-loan-interest-rates-for-aussie-homeowners

The Reserve Bank of Australia (RBA) has recently raised the cash rate from 0.35% to 0.85% — but what does it mean for you?

Back in 2020, when the COVID-19 pandemic hit us hard and strong, the Australian government had to take measures to fight the rising unemployment. One of the measures was to reduce the cash rate, which in turn protected investments and kept Aussies in jobs.

So, the cash rate had been sitting at a record-low of 0.1% until May 2022 — but things are changing rapidly.

Inflation is rising at a constant pace now, and the government will be compelled to take steps to fight it. So, experts predict we’re in for a series of anticipated hikes in the cash rate. But even that may not suffice, and authorities might raise it even more in the coming weeks, months, and years.

But does this cash rate increase affect you in any way? Let’s find out.

The cash rate is an ever-changing metric

The cash rate reflects a fixed number that determines how much interest rate banks and lenders have to pay when they borrow money. Yes, it doesn’t directly affect how much interest rate you, as an end-customer, have to pay. But there are other ways how this metric affects you; more on that later.

The cash rate is announced on the first Tuesday of each month of the year — except January. It’s determined based on a number of factors, like the current inflation and employment rate.

When there’s a lack of jobs, the RBA may reduce the cash rate to create more opportunities. When inflation is rising, however, the RBA may increase the cash rate to counter it.

Yes, you do get affected, although indirectly

Even though there’s no mention of end-customers when it comes to the cash rate, you do get affected by it indirectly.

When the cash rate rises, banks and other lenders increase their home loan interest rates in Australia to cope with it. So, you’re the one who pays more interest on your home loan in the end as a result of rising interest rates.

Consider the case of Jane, our hypothetical homeowner:

  • Jane’s loan amount: $600,000
  • Variable interest rate in April: 3% p.a.
  • Jane’s loan term: 25 years

Jane’s lender increased her variable interest rate in line with the RBA’s rate rise in May. Jane’s repayment increased by $47.03 per month. However, after June’s cash rate rise, Jane’s monthly repayments are now $273.27 more per month than before these two rises.

Expect to see the cash rate skyrocketing soon

Economists from major financial institutes had already predicted the cash rate increase that we’ve already seen. And according to them, it could easily rise to more than 2% in the next two years.

Westpac says it will rise to more than 2% in May 2023. NAB says we could see it jump to more than 2.5% by August 2024. But the worst news: ANZ thinks it could increase a whopping 3% during 2023.

What should you do next?

If you’ve been depositing money in your Savings account to buy a new house, there’s good news for you: you aren’t doomed. When banks raise the interest rate for home loans, they also increase the interest rates you get on your savings.

However, considering the rising inflation, it may not be a good idea to let your cash sit in there. Savvy investors are discussing their property investment options with their home loan broker right now. They know that with rental demand higher than ever before, investing into property as part of your overall investment strategy is smart. In short, there’s no better time to invest than right now.

That’s where Fox Home Loans comes into play

At Fox Home Loans, we have a simple approach to our day: source our customers the very best home loan deal that’s available on the market today.

We are constantly monitoring the market on a daily basis, and we’ll guide you through the minefield of lender options out there to find a home loan that’s perfect for your unique circumstances. It might sound a little crazy, but we have literally hundreds of home loan products to consider for our customers, which will save you time and money.

Sounds good? Click here to speak to your home loan specialist right away!