Last 2 November 2022, the Reserve Bank of Australia (RBA) has yet again raised the official cash rate (OCR) by 25 basis points, up to 2.85%. This is the seventh cash rate hike this year, the first one on May.
It’s been a long time since Australia has experienced an interest rate rise, and for many of us, it’s definitely something we’re not looking forward to. So what does this mean for Australians with mortgages? What can we do to prepare ourselves? And most importantly, how can we make sure that when our rates do go up, we’re ready for it?
Keep reading to find out.
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What is cash rate Australia?
The cash rate is the interest rate set by the RBA on overnight loans between commercial banks. It influences other Australian interest rates in the economy and is one of the tools the RBA uses to manage Australia inflation.
Here’s a graph illustrating the RBA cash rate history:
As you can see, the RBA cash rate had a steep decline since 2010. It averaged 3.85 percent from 1990 until 2022, reaching an all time high of 17.50% in January 1990 and a record low of 0.10% in November 2020.
The RBA meets every month (excluding January) to decide on its target for the cash rate, which is currently set at 2.85%.
What is an interest rate?
The interest rate in Australia is determined by the RBA who sets the cash rate. The Reserve Bank interest rates affect all Australians, but it has a particularly big impact on homeowners in Australia as lending institutions base their home loan rates on the official RBA cash rate.
The official cash rate serves as a benchmark for the Australian interest rate, and hence the interest rates for mortgages, savings, credit cards, and loans.
What does interest rate rise mean?
When the RBA cash rate goes up, so does the interest rate, and it gets more expensive for banks to borrow money. This means that banks then have to pass on to their customers the costs borne in cash rate hikes by increasing their lending rates.
This increased cost gets passed on to homeowners in the form of higher home loan rates.
Interest rate forecast for next 5 years Australia
The RBA board mentioned that further hikes in interest rates can be expected as Australia inflation is too high. They also mentioned that they see the inflation peaking around 8% this year, 4.75% in 2023, and above 3% in 2024.
This will most likely result in a continuous cash rate hike for the next few years as the RBA is committed to bring inflation to target levels and will do what is needed to attain this goal. Despite the earlier forecast of RBA halting the cash rate at 2.5%, financial market experts predict that it will further peak at 3.9% next year.
What you can do to cope with further hikes in interest rate Australia
If you’re one to follow Australian news on the movement of the economy, then you know very well that you will have to brace yourself for the trickle down effects of these successive cash rate hikes. You are definitely going to take a hit if you are:
- a home loan first time buyer
- someone taking out a refinancing home loan
- on a fixed rate home loan (your rate will revert to variable once your fixed term ends)
- on a variable interest rate (the effect is immediate)
While there’s no need to panic just yet, it’s a good idea to start preparing yourself for the possibility of higher interest rates down the track. Here are a few things you can do to cope with rising interest rates:
- Review your budget and make sure you’re not spending more than you can afford
- Make extra repayments on your mortgage or other loans while interest rates are still low
- Be proactive and talk to your bank or mortgage broker about what options are available to you.
- Check the current interest rates and shop around to compare home loans — you may want to seriously consider refinancing if you are paying way too much on your current home loan
What is a comparison interest rate?
When banks offer home loans to their customers, they often advertise a lower “comparison rate”. A comparison interest rate is the rate you would be offered if you took out a loan from a bank, compared to the RBA cash rate.
The comparison rate is published by the Australian Prudential Regulation Authority (APRA) and it’s meant to help borrowers compare home loans.
Let the brokers at ZEP Finance help you cope with interest rate increase
The interest rates are on the rise and it’s time to do something about it. ZEP Finance can help you get ahead of the game as we understand thoroughly the current market and how it may impact your specific situation. At ZEP Finance, our brokers are always up-to-date on the latest news and changes in the industry so they can help you make decisions that will benefit you in both the short and long run
We look forward to hearing from you soon!
Speak with a Mortgage Broker Ballina
Speak with a Mortgage Broker Byron Bay
Speak with a Mortgage Broker Lismore
Speak with a Mortgage Broker Northern Rivers
After studying business and finance at university, Zain initially expected to pursue a career in finance. However, his passion for property and the experience of buying his own home led him to mortgage broking. He began his mortgage brokering career in 2009 and founded ZEP Finance in 2010.
