Earlier this week (Tuesday 7 June) the Reserve Bank of Australia (RBA) raised the official cash rate for the second month in a row, from 0.35 to 0.85 percent.
Last month the bank increased the cash rate from the historic low of 0.1 percent, where it had remained since November 2020.
Since last month’s cash rate increase, 97 percent of lenders in Loan Market’s panel of over 60 lenders, including the big four banks, increased their variable rates in-line with the .25 percentage point jump.
Consequently, homeowners on variable rate loans are likely to already be paying more each month in interest rates. For example, someone who had a 3 percent per annum variable interest rate, on a 25-year term, on the average home loan amount of $611,524 – would be paying $80 more per month, prior to Tuesday’s announcement.
Should lenders increase variable interest rates in-line with this week’s cash rate increase, the homeowner in the above example – could be paying $244 more per month than before the two cash rate increases.
Why is the cash rate increasing?
The RBA first increased the cash rate last month, following the release of data that showed that the cost of goods and services has risen steeply in the last quarter.
By increasing the cash rate, the RBA hopes to cool Australia’s inflation, which has climbed to 5.1 percent.
However, a complication to this plan was the release of data that showed wages grew by only 2.4 percent over the quarter to March. This means real wages have decreased since inflation has grown, and many workers are finding that higher price inflation is eroding the real value of their earnings.
Governor of the RBA, Dr Philip Lowe, said that while inflation in Australia was lower than most other advanced economies, it was higher than earlier expected.
“Global factors, including COVID-related disruptions to supply chains and the war in Ukraine, account for much of this increase in inflation,” he said.
“But domestic factors are playing a role too, with capacity constraints in some sectors and the tight labour market contributing to the upward pressure on prices.”
Dr Lowe added that the recent increase in interest rates would assist with returning inflation to target, with future raises likely in the months ahead.
Lenders tighten lending requirements:
A number of lenders have announced that they will be stricter in lending requirements. For example, ANZ said it would no longer take applications from borrowers with a debt-to-income ratio of 7.5 or more. Similarly, NAB said it would not take applications from borrowers with a debt-to-income ratio of 8 or higher.
What about fixed rates?
We are also seeing fixed rates going up across the board. For example, according to Loan Market data, Commonwealth Bank increased one, two, three, four and five-year fixed rates, since November last year. Its three and four-year term fixed interest rates, both increased by 2.3 percentage points over this period.
What can you do?
With interest rates and lending requirements changing at a dramatic rate, now is a good time to evaluate your home loan. At Finance Industries Australia, we can compare your current loan to a panel of over 60 lenders and help determine whether you could be moved to a more competitive deal, and thus – could be saving money.
The information provided herein is on the understanding that it is for illustrative and discussion purposes only. Whilst all care and attention is taken in its preparation, any party seeking to rely on its contents or otherwise should make their own enquiries and research to ensure its relevance to their specific personal and/or business requirements and circumstances.