At its meeting today, the Reserve Bank of Australia raised the cash rate by 0.25 percentage points to 3.85%. This article takes you through the reasons for the rate increase and what the latest cash rate hike means for your home loan. In his statement on the decision, RBA governor Dr Philip Lowe said, “Inflation in Australia has passed its peak, but at 7% is still too high and it will be some time yet before it is back in the target range. Given the importance of returning inflation to target within a reasonable timeframe, the board judged that a further increase in interest rates was warranted today.” He further explained, “A significant source of uncertainty continues to be the outlook for household consumption. The combination of higher interest rates, cost-of-living pressures and the earlier decline in housing prices is leading to a substantial slowing in household spending. While some households have substantial savings buffers, others are experiencing a painful squeeze on their finances. There are also uncertainties regarding the global economy, which is expected to grow at a below-average rate over the next couple of years.” We’ve already had multiple messages from our clients about refinancing home loan following the news today, signifying that this last rate hike may be really starting to get people thinking about where they can save money. Let’s look a bit closer at how this latest cash rate increase impacts borrowers, what it means for property values, and what you can do to mitigate any interest rate rise. Alternatively, save yourself some time and book in for a chat about your home loan now by clicking here.

How Does The Cash Rate Affect My Interest Rate?

Lenders add a margin to the official cash rate to determine the variable interest rate they offer to customers. So if you have a variable interest rate, it will almost certainly go up with a cash rate increase. Fixed rate home loans will obviously remain unchanged. In spite of the aggressive interest rate changes, we have recently seen the trend in housing values stabilise, if not show a level of growth in some regions.  The more positive trend is a stark reminder that the performance of housing is influenced by a broad range of factors that go well beyond interest rate settings. This bodes well for those in the market to refinance, as you may have seen some good growth in the value of your property since and an increase in equity may be a consideration.

Why Did The RBA Increase The Cash Rate?

As explained in their statement, the measures taken by the RBA are predominantly focused on a return to target inflation. Although it seems to have passed the peak, at 7% inflation, it is still considered too high. “The Board is still seeking to keep the economy on an even keel as inflation returns to the 2–3 per cent target range, but the path to achieving a soft landing remains a narrow one. The central forecast is for the economy to continue growing, albeit at a below-trend pace; GDP is forecast to increase by 1.25% this year and around 2% over the year to mid-2025. Given the expected below-trend growth in the economy, the unemployment rate is forecast to increase gradually, to be around 4.5% in mid-2025,” explained Dr Lowe.

How High Will The Cash Rate Increase?

This is unknown. Although there is a sentiment among economists that we are nearing the end of the increases; some believe the top of the cycle will be a cash rate of 3.85% – the current figure. Tim Lawless, CoreLogic’s Executive Research Director Asia-Pacific, said “Today’s interest rate decision was always going to be a line ball; however, the 25 basis point lift is likely to be the last in what has been the most rapid rate hiking cycle on record.” “Although inflation has been trending lower since peaking in the December quarter 2022, today’s rate hike reflects the RBA’s uncertainty about how ‘sticky’ inflation might be amid persistently tight labour markets and new evidence that housing prices have moved through their low point,” He said. CoreLogic’s figures released yesterday showed a second consecutive monthly rise in national housing values with each of the four largest capitals recording a lift in values over the rolling quarter.

Lenders reviewing fixed Home Loan rates

Since last month, we have started to see lenders reviewing their fixed rates, which can be often be an indication that we are nearing the end of the rate increases cycle. If you are one of the many borrowers coming out of a fixed rate loan, you might be interested in reading more about the suggested next steps here: https://basehomeloans.com.au/2023/03/20/are-you-on-the-edge-of-a-mortgage-cliff/ For those looking to review their interest rate to investigate any potential cost savings, most of the larger banks are currently advertising variable interest rates at about 5.6%, but there are cheaper rates available in the market, so please get in touch to see what we can do for you. Want to talk about your borrowing options with a Perth mortgage broker? Contact us to get an idea of the best home loan interest rate Perth lenders are offering this week. All lending subject to status and lenders criteria. Terms & conditions apply. This document contains general information only. Your own personal circumstances have not been considered and you should seek independent financial advice prior to making any decision on a financial product.

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