Reserve Bank increases interest rates again to 2.6% target rate

The Reserve Bank of Australia (RBA) has hiked the official cash rate by another 25 basis points to 2.60%. How will this rate hike impact your monthly mortgage repayments, and when will it happen?

At the beginning of May, the cash rate was just 0.10%. Today it increased for the sixth straight month to 2.60%.

It’s worth noting that the cash rate hasn’t been this high since July 2013, almost ten years ago.

The speed at which the increases have occurred has stressed many. And there are concerns about when it will stop. In reality, the Reserve Bank has probably been too slow, started acting too late, and may keep the rates going too long and then find themselves having to reduce rates sooner than planned.

 The time to have started altering the cash rate was probably around July 2021, with small – 0.1 to 0.15% increases perhaps every 1 or 2 months – to cool the market before inflation took off. We don’t know whether there was economic or political pressure to avoid taking action, but we now have an overheated economy struggling to cope with the internal and external pressures evident daily in the news and the financial results personally, locally and globally.

We face further rate rises – perhaps taking the target cash rate to around 4% (a further 1.5% over the next few months) with maybe a pause for 3 – 4 months in 2023 before further ‘adjustments’ become necessary – that could go in either direction. The fact that this was a 25-point rise instead of another 50-point rise points to a possible easing by the RBA as they approach their desired ceiling. Inflation numbers will be key in the coming months – as will GDP and growth numbers. And the October Federal Budget could be a game changer. No pressure on the Treasurer at all!

RBA Governor Philip Lowe said that further increases were likely over the period ahead.

“The cash rate has been increased substantially in a short period of time. Reflecting this, the (RBA) board decided to increase the cash rate by 25 basis points this month as it assesses the outlook for inflation and economic growth in Australia,” said Governor Lowe.

How much extra will your mortgage be each month?

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 soon.

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 monthly. That’s an extra $685 on your mortgage compared to May 1.

If you have a $750,000 loan, repayments will likely increase by about $110 monthly, up $1030 from May 1.

Meanwhile, a $1 million loan will increase almost $150 a month, up $1,380 from May 1.

So when exactly will this latest rate rise kick in?

When the RBA hikes the official cash rate, your bank will usually announce its own interest rate hike (and have its own notice period) for variable rates in the following days.

Let’s run through a quick example.

Assuming your monthly mortgage repayments are made on the 20th day of each month.

Let’s also assume you receive a notice from your lender this Friday (October 7) of their own subsequent rate increase, with a 30-day notice period.

By the time October 20 arrives, you won’t be paying higher repayments, as the full 30 days notice would not have passed.

When that 30-day notice finishes on November 6, the daily interest rate you’re charged will increase to the new amount.

That means when your monthly repayment on November 20 rolls around, you’d be charged at the new, higher rate (but calculated only from November 6).

By the time December 20 arrives, the monthly repayment amount you’re charged will fully reflect the new rate.

Some options we can help you explore include refinancing (which could include increasing the length of your loan to decrease monthly repayments), debt consolidation, or building up a bit of a buffer in an offset account ahead of more rate hikes.

If you’re worried about how you’ll meet your repayments in the months ahead, give us a call today. We can work with our associates and look at getting you the best deals on the market – even with your existing bank!

To start that process – and get a clear picture as to what your numbers look like – grab our fact finder at Fiscal Artisans Fact Finder