Last June 7th, the Reserve Bank of Australia (RBA) announced a cash rate increase from 0.35% to 0.85%. This move comes as inflation continues to climb, with the RBA board declaring that the increase is necessary in order to meet its target of 2-3% inflation. We can expect to see more rate inclines in the next few months which will have flow-on effects for borrowers. Find out how it can affect you and what you can do to prepare for it.
First off, what is the cash rate?
The cash rate is the rate charged on overnight loans between financial institutions. The RBA uses this rate to influence other interest rates in the economy, such as mortgage and savings rates. When the RBA wants to encourage borrowing and spending, it will lower the cash rate. Conversely, when it wants to slow down the economy, it will raise the cash rate.
What does this cash rate increase mean for you?
The recent cash rate increase means that we can expect other interest rates in the economy to also go up. This includes mortgage rates, credit card rates, and savings account interest rates. For example, if you have a $300,000 mortgage over 25 years with an interest rate of four per cent, a 0.25% rate hike would mean an extra $52 in repayments each month, or $656 per year.
While this doesn’t seem like much, it can add up quickly – especially if the RBA raises rates multiple times in the next few months, as they’re expected to. And, of course, if you have a larger mortgage, the impact will be even greater.
What can you do about the cash rate increase?
If you’re concerned about how higher interest rates might affect your finances, there are a few things you can do.
If you have a variable home Loan: How does cash rate affect your home Loan?
You can expect your repayments to increase within the next few as banks would pass on this rate. There’s no need to panic – your repayments will still be lower than they were a few years ago. You should receive direct correspondence from your bank if you are affected. It is likely that the increase will be 0.50% to your current interest rate. Banks may decide to increase higher than that as this is up to their discretion.
Now might be a good time to lock into a fixed rate. This will protect you from any further interest rate rises in the short term and could save you a lot of money down the line.
Of course, fixed rate mortgages typically have higher interest rates than variable rate mortgages, so you’ll need to weigh up whether the peace of mind is worth the extra cost.
You could also consider making extra repayments on your mortgage. This will reduce the amount of interest you pay over the life of your loan, and means you’ll be able to pay off your mortgage sooner.
If you are a saver: How does cash rate affect your savings?
The cash rate increase may be good news for you. You may see some relief as rates on term deposits and savings accounts start to rise. This means that you’ll earn more interest in your savings.
Now might be a good time to shop around for a high-interest savings account so you can make the most of your money. Just be sure to read the fine print, as some accounts have conditions that you’ll need to meet in order to earn the highest interest rate.
If you’re looking to buy a property: How does cash rate affect your new home?
If you’re in the market for a new home, you may want to act now before interest rates go up even further.
Of course, this is a big decision, and there are a lot of factors to consider. But if you’ve been thinking about buying a property, now might be the time to start doing your research and talking to a mortgage broker.
They can help you figure out how much you can afford and what kind of loan would be right for you. They can also give you an idea of what to expect in terms of interest rates and repayments. BFG home loan experts can also advise on how you can best manage your budget and loan repayments.
If you’re looking to refinance: How does cash rate affect your home Loan refinancing?
If you’re thinking about refinancing your home loan, now could be a good time to lock in a fixed rate. This could protect you from any further interest rate rises. Be mindful though that fixed rates are typically higher than current variable rates (even with the new increase in rates). It’s important to remember that refinancing may come with costs. Best to weigh up whether the savings are worth it.
You can use a refinancing calculator to compare different home loan options and see how much you could save. BFG home loan experts can help you navigate these changes and figure out if refinancing is right for you.
Regardless of where you are in your home buying journey
Take a close look at your budget and see where you can make some cuts. If you’ve been wanting to save more money or pay off your debt faster, now is the time to do it.
Finally, remember that this isn’t the end of the world. Interest rates may rise but with an effective strategy, you can minimise its impact on your finances. So try not to panic – a few small changes now can make a big difference down the line.
The BFG promise
Benevolence Finance Group (BFG) reaffirms its commitment to helping you navigate through your home loan options. A little bit of planning now can go a long way. It will help you manage your finances and stay on track with your goals. Our mortgage experts are here to help you every step of the way. Give us a call when you are ready and we will ensure that you are getting the best possible deal on your home loan.