The Reserve Bank has increased interest rates for the 10th consecutive meeting at its monthly March meeting. The cash rate was increased by 0.25%, and it has increased by 3.5% since the first of the 10 increases in May 2022 to reach an 11-year high.
Most lenders have passed on at least this 3.5% increase on their range of loans. Read on to find out the reason for all the increases, as well as answers to interest rate FAQs.
Will interest rates continue to rise?
Unfortunately, many analysts are tipping further increases at the forthcoming monthly Reserve Bank meetings before interest rates peak.
The reason the Reserve Bank has been increasing rates is to combat Australia’s rising inflation rate, which has been 7.4% over the past 12 months. The Reserve Bank’s target inflation rate is between 2 and 3%, and increasing interest rates is the major tool available to policymakers to help drive the rate down.
Reserve Bank Governor Philip Lowe stated in his interest rate announcement that “The monthly CPI indicator suggests that inflation has peaked in Australia.” However, he also stated that “The (Reserve Bank) Board expects that further tightening of monetary policy will be needed to ensure that inflation returns to target and that this period of high inflation is only temporary.”
How much have average home loan repayments increased?
An average borrower with a $500,000 variable rate home loan will have seen their monthly repayments increase by $983 since the first of the rate increases. This is pushing more borrowers into “mortgage stress,” generally defined as a situation where more than 30 per cent of household gross income is going to mortgage repayments.
The fixed rate “cliff”
One sobering aspect of the many interest rate rises since May is that their effect is yet to be felt by borrowers who took out fixed rate loans beforehand. The Reserve Bank estimates that the number of borrowers who will come off low fixed rates into the much higher current interest rate environment in 2023 is in the “high 800,000s”. These borrowers will face a steep increase in their monthly repayments as soon as their fixed rate period ends, a situation that has been described as “the fixed rate cliff”.
If you are facing this prospect, you can read about your financing options here.
What effect do interest rate rises have on borrowing power?
Besides increasing loan repayments, the other major effect of higher interest rates is that they reduce borrowing power for new loan applicants.
Lenders are legally required to assess a borrower’s capacity to make loan repayments at an interest rate that is at least 3 per cent higher than their current loan rates. This requirement is aimed at protecting borrowers and lenders from the risk of loan default (i.e. borrowers being unable to make their repayments) if interest rates rise.
According to analysts, a couple on an average dual income in Australia will have seen their borrowing power decrease by more than $300,000 since the first of the interest rate increases last May.
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