Third consecutive RBA cash rate hike hits borrowers hard: what can you do?
Your home loan rate will get even more expensive, and the worst is yet to come.
The Reserve Bank of Australia (RBA) raised the official spot rate again. Most pundits saw this coming and the RBA wasn’t really keeping it a secret.
The official exchange rate is now 1.35%.
It is now the third month in a row that the cash rate has increased. In April, the spot rate was just 0.10%. The RBA raised the cash rate by 25 percentage points in May and another 50 percentage points in June.
Today’s rate hike is a costly decision for the average Australian borrower. If you have a variable mortgage with an interest rate of 2.60% today, it will probably increase to 3.10% in the days or weeks to come.
If you had borrowed $500,000 over 30 years, that means your monthly repayments would go from $2,001 to $2,135.
That’s $134 a month right there. And if you factor in the rate hikes of the past few months, you’re looking at big increases. And that’s before you think about the other cost of living increases that are making life difficult for everyone.
What is the cash rate?
The official cash rate target affects lenders’ borrowing costs. Banks don’t always have the cash to fund your home loan, so they often borrow money from other places (or lend to other institutions in the market). The rate applied to these borrowings and lending is what the RBA calls the ‘inter-bank unsecured overnight lending’ rate.
In practice, when the cash rate rises, lenders quickly pass the increase on to borrowers who currently have variable interest rate loans.
Fixed rate loans for new borrowers are also increasing, although these loans are funded differently. Borrowers who have already fixed their interest rate are fine for now, as these rates do not change by definition.
What can borrowers do to mitigate today’s cash rate decision?
Most borrowers now face higher rates. But that doesn’t mean you can’t get a better deal. There is always a lower rate in the market. And many lenders offer their lowest rates to new customers (which is incredibly annoying for their existing customers).
Here are some simple tips:
- Give it a few days. Lenders will not raise your rate at this time. They’ll play cool for a few days, assess their own funding sources, and then announce their pricing decisions.
- Check your interest rate. It’s always a good idea to start with your current rate so you know exactly what you’re being charged.
- Check your lender‘s website. You might be shocked to find that your lender offers a better deal to new borrowers with a loan identical to yours (this can happen to anyone, even mortgage experts). Call your lender and ask for the same rate as new borrowers.
- Compare and prepare to change. Your current lender might be happy to give you a better deal. But it’s really good to check the prices of the whole market anyway. You might find a much better deal. Read our home loan refinance guide to see how easy the change can be.
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