RBA raises the cash rate to 3.85% in May going against the majority of predictions

On May 2nd the Reserve Bank of Australia (RBA) increased the official cash rate to 3.85%, going against most financial predictions. Is this the peak for home loan variable rates, and what does it mean for your mortgage?

In what will undoubtedly be tough news for many households around the country, this latest rate hike comes despite many pundits predicting the RBA would keep the cash rate on hold for at least another month.

RBA Governor Philip Lowe said while inflation in Australia has passed its peak, at 7% it was still too high and it would take some time before it was back in the target range of 2-3%.

“Given the importance of returning inflation to target within a reasonable timeframe, the Board judged that a further increase in interest rates was warranted today,” he said.

However, in what may come as welcome news to mortgage holders, Governor Lowe softened his language around the possibility of further rate hikes.

“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve,” he said.

How much could this latest hike increase your mortgage repayments?

Unless you’re on a fixed-rate mortgage, the banks will likely follow the RBA’s lead and increase the interest rate on your variable home loan very shortly.

Let’s say you’re an owner-occupier with a 25-year loan of $500,000 paying principal and interest.

This month’s 25 basis point increase means your monthly repayments could increase by almost $75 a month. That’s an extra $1,060 a month on your mortgage compared to 3 May 2022.

If you have a $750,000 loan, repayments will likely increase by about $112 a month, up $1590 from 3 May 2022.

Meanwhile, a $1 million loan will increase by about $150 a month, up about $2,130 from 3 May 2022.

What happens if the cash rate increases further?

Economists at the big four banks are forecasting that the cash rate will now either remain at 3.85% or have one more hike to 4.10%.

Assuming you’re an owner-occupier with a 25-year loan, here’s how much more you could be paying each month if the cash rate reaches 4.10%:

• $500,000 loan: approximately $75 more = up $1,135 from 3 May 2022 to a total of approximately $3,470 per month
• $750,000 loan: approximately $112 more = up $1702 from 3 May 2022 to a total of $5,200 per month
• $1 million loan: approximately $150 more = up $2280 from 3 May 2022 to a total of $6,950 per month

You can take action to get relief on home loan repayments

Despite the increase, there are still favourable home loan deals in the market, and options around debt consolidation which may help lower your repayments.

Refinancing can include increasing the length of your loan and decreasing monthly repayments), debt consolidation, or building up a bit of a buffer in an offset account ahead of more rate hikes. It all comes down to a professional looking at the best option for you.

There’s no denying that a lot of households around the country are feeling the pain of these rate rises.

There are also lots of people on fixed-rate home loans wondering just what options will be available to them once their fixed-rate period ends.

If you’re worried about how you might meet your repayments going forward, give us a call today. Understanding your options can start with a simple phone, web, or in person discussion.

This article is prepared based on general information. It does not take into account individual financial objectives or needs and is not financial product advice.