RBA Cash Rate Hike Explained – How It Could Affect Homeowners

With the RBA forecasting a rate hike this year, AMP chief economist Shane Oliver sheds some light on how this is affecting homeowners and buyers.

What is the cash rate?

According to the Reserve Bank of Australia, the cash rate “the interest rate on unsecured overnight loans between banks. It is the (near) risk-free reference rate (RFR) for the Australian dollar.”

Sometimes referred to as the ‘base rate’, the cash rate is set by the Reserve Bank of Australia at a board meeting each month (except January).

This rate is the base rate charged for lending between financial institutions (such as banks) and can have a significant impact on the price of financial products.

In Australia, a high RBA cash rate has historically resulted in high interest rates on home loans, car loans, personal loans, savings accounts, term deposits, etc. Likewise, a low cash rate translates into low interest rates on these products, which is good for borrowers but not for savers.

As of today, Australia’s current cash rate is 0.10% and is at an all-time low since November 2020. The infographic below shows the recent history of the Australian cash rate.

The recent RBA meeting resulted in no change in the cash rate, but speculation is high that a rate hike is imminent.

The cash rate has not increased since November 2010.

What is a rate hike?

A rate hike occurs when the RBA raises the policy rate to slow lending.

AMP Capital’s chief economist Shane Oliver told Savings.com.au that a rate hike is a sign of a recovering economy.

“A rate hike is in response to the economic recovery, which has happened faster than the RBA expected,” he said.

“We have seen the unemployment rate fall and inflation higher.

“The rate cuts we saw when lockdowns began in 2020 should support the economy. Now that the economy is reopening, it is appropriate that these emergency interest rates be scrapped.”

Mr Oliver said AMP Capital expects the RBA to raise the cash rate in August 2022 but would not expect a hike as soon as June.

“We’re saying August, but it could be as early as June depending on payroll data, which is released in about two weeks.”

What does it mean for the economy?

Mr Oliver reiterated that a rate hike is actually a positive sign for the economy.

“Typically when the economy is slow and inflation is low and widespread and slow, interest rates go down,” he said.

“The fact that there’s talk of them rising is actually a good sign that we’re moving towards something more normal.

“Of course, higher interest rates have a somewhat dampening effect on things.

“Money isn’t that cheap, so you pay more to borrow money, which slows down lending — potentially reducing the amount of money you can borrow.

“And it also reduces purchasing power, not only for households but also for businesses. And that may eventually lead to slower economic growth.”

How is it affecting homeowners?

Home loan interest rates are closely tied to the cash rate – the lower the home loan interest rate, the lower the home loan interest rates are likely to be as lenders struggle to offer the most competitive rates on the market.

That means if you have an adjustable rate home loan, your repayments will likely increase with an RBA rate hike.

Mr Oliver said around 70% of mortgages in Australia are adjustable rate.

“The rough breakdown is that about 30% of existing homeowner mortgage debt has fixed interest rates and 70% has variable interest rates. So right now there isn’t much of an impact on them if interest rates are suspended,” he said.

“The real impact will come when the Reserve Bank starts raising interest rates later this year.

“They may see an increase in the interest rate on their mortgage… [and] an increase in the amount of money they have to spend to service their loan.”

Mr Oliver said many homeowners have been able to take advantage of this period of low interest rates to get ahead with their mortgage.

“Some people built up buffers,” he said.

“Because of the lockdowns, people tended to save more, couldn’t spend as much and couldn’t go on holiday. And consequently you have a large proportion of Australians who are ahead on their mortgages.

“Others, on the other hand, who haven’t used the period or haven’t been able to use the last few years to get their mortgage going will have a little more pain, they’ll face higher overall debt service costs.”

Recent APRA data shows that the average homeowner is four years ahead on their mortgage.

How is it affecting homebuyers?

Mr Oliver said an increase in cash interest rates could put some pressure on the housing market.

“There will be fewer people out there buying because you have that kind of dual success in the affordability housing market because housing is more expensive but also higher interest rates meaning new borrowers can borrow less and therefore have to pay up lower prices,” he says.

“That may mean pressure on prices or a slight slowdown in price growth.

“Last year property prices across Australia rose by 22%. They could be down about 3% this year — a more subdued real estate market.

“Later in the year or early 2023, house prices could drop a bit. We expect a drop of 5 to 10%.”

“Higher interest rates – ultimately, they bode well for an economic recovery, but it can also mean slower economic growth…let’s say[ting] a small damper on the real estate market.”

How are lenders/banks adapting?

Banks and lenders don’t have to move in lockstep with the RBA’s cash rate, and many have already increased fixed rates on home loans over the past year.

Mortgage broker Aaron Christie-David said banks are “luring” customers back to adjustable-rate home loans.

“Banks have definitely lowered their variable rates while raising their fixed rates… apparently to attract customers,” he told Savings.com.au.

“More and more are opting for an actual fix as they see interest rates continue to rise. Sounds counterintuitive as fixed rates are higher, but customers are choosing security for the next few years.”

See also: Fixed vs Variable Home Loans


Image by Joshua Earle via Unsplash

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