Over the last 10 years, the first Tuesday of every month may have been something you actually looked forward to - because the cash rate either remained stable OR actually decreased #winning.

And a lower cash rate meant lower mortgage repayments and more money to go to savings, home renos or a good ol'-fashioned splurge.

But this year, it’s all changed. Since May 2022, the RBA has raised the cash rate six times. Yes, six times in a row. 

And now the RBA has hiked interest rates again. This time, they have increased the cash rate by 0.25% - and this brings the official cash rate to 2.60%.

Why are the RBA continuing to raise interest rates?

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One of the Reserve Bank of Australia’s main responsibilities is to manage the economy. This includes things like inflation, unemployment and wages growth.

In August 2022, Australian inflation was at 6.8% - and it’s fair to say that is well above the targeted 2-3% each year. If this inflation continues, we’ll be paying $100 for a slurpee in no time.

And one of the most effective ways to manage inflation is by raising the cash rate because it creates a bit of a domino effect:

• RBA raises cash rate by 0.25%
• Bank raises variable interest rate on home loan by 0.25%
• Borrowing costs for borrower increases by hundreds of dollars each month
• Spending in the economy reduces because most borrowers feel a fair bit poorer
• Reduced spending usually leads to lower prices because the demand for products and services softens (that Pangaia jumper can wait a few more months…)

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How will the interest rate rise impact my home loan?

If you’ve got a variable rate home loan (or if part of your loan is variable), it might be time to look at a few options. Why? Well, when the official cash rate goes up, the banks usually increase home loan interest rates by the same percentage. If you have a fixed-rate loan, it’ll stay fixed for the fixed period.

Here’s a breakdown of how your repayments will likely change based on a 25 year repayment term on a variable home loan.

How does an interest rate rise impact my home loan?

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Source: MoneySmart. Based on owner occupier loans of $500,000, $750,000 and $1,000,000 over 25 years.

 All information contained in the Flux app is for education and entertainment purposes only. It is not intended as a substitute for professional financial, legal or tax advice. While we do our best to provide accurate information on the podcast, we accept no responsibility for any inaccuracies that may be communicated

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