RBA lifts cash rate for first time since 2010: What do I do?
Borrowers need to watch out for their lenders raising rates in the coming days or weeks and consider switching to a better deal.
The Reserve Bank of Australia (RBA) today raised the cash rate target for the first since November 2010. Many experts predicted the rate would rise soon, but not this soon. 23% of the experts in Finder's RBA survey called today's decision.
The decision means many borrowers' mortgage repayments are about to rise. The RBA increased the cash rate target by 25 basis points. The cash rate is now at 0.35%.
If you were on a variable interest rate of 2.00% today, with a loan amount of $450,000, your monthly repayments would be $1,663.
If your lender passes on the rate rise, your rate would jump to 2.25%. Your repayments would rise to $1,720.
That's an extra $57 a month or $684 a year.
The end of historic low mortgage rates
This rate rise is big news for Australian borrowers. Over the last few years, home loan interest rates have been incredibly low. This has made it very cheap to borrow money. And while home loan rates are still very low, the bank's decision means we're now moving to a higher rate environment.
In May 2019 the lowest variable rate loan in Finder's database was 3.48%. And that was considered a low rate back then. In May 2022 the lowest variable rate was 1.79%.
If you'd borrowed $460,000 over 30 years (which is around the current Australian average) back in 2019, with a rate of 3.48% you'd be paying $2,060 a month in repayments.
If that rate fell to 1.79% that would fall to a monthly repayment of $1,652. That's a difference of $408 a month or $4,896 a year.
Now with rates moving up again and probably continuing to rise gradually for a while, borrowers could soon find themselves with interest rates that start with a 3 rather than a 1.
What should I do with my loan right now?
If you're on a fixed rate loan you can relax. It can't change. That's why you fixed. If your loan has a variable rate it could change at any time. In this case, there are 3 simple steps to take:
- Check your lender's website and see if it has raised interest rates. It might have emailed you about it. Or your lender might have raised your rate and said nothing at all. Check your next home loan statement to be 100% sure. You'll need to keep monitoring your loan's interest rate in the days and weeks to come. Some lenders raise interest rates as soon as the RBA makes a decision. Some will raise them later, earlier or not at all. It really does depend on the lender.
- You should also look at other home loan rates on the market to see what other lenders are doing. You could find there are better deals out there. Some lenders will try to keep rates lower than others in order to get new borrowers in.
- If you do find a better deal, consider a home loan refinance. This simply means applying for a new loan with a new lender, getting approved, then exiting your old loan.