How rising interest rates will affect your household budget

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The Reserve Bank of Australia raised interest rates by 25 basis points. Here’s what that means for you.

Interest rates have risen from 0.1 per cent to 0.35 per cent – the first rise in 11 years – in a move that is sure to add stress to many people’s mortgages.

In a statement on Tuesday, the Reserve Bank of Australia said the board had decided the time had come to start withdrawing some of the “extraordinary monetary support” that had been put in place to help the economy during the pandemic.

“The economy proved resilient and inflation rose faster and higher than expected,” the RBA said.

“There is also evidence that wage growth is accelerating. Given this and the very low level of interest rates, the process of normalizing monetary conditions should be initiated.

Experts predict that the rise is the start of an uptrend.

So what does a cash rate of 0.35% mean for your mortgage?

According to Finspo, an average homeowner with a 30-year loan of $300,000 on a current interest rate of 2.47% per year, will see their repayments increase by $39 per month, or $468 per year, with an interest rate increase of 0.25% per year.

If your loan is $400,000 your repayments will increase by $52 per month, or $624 per year.

A person with a $500,000 loan will now pay $66 more per month, or $792 per year.

A loan of $600,000 will increase repayments by an additional $78 per month, or $936 per year.

For a $700,000 loan, the repayment amount will be an additional $92 per month, or $1,104 per year.

Anyone with a $800,000 will have to make additional repayments of $105 per month, or $1,260 per year.

Finally, if your loan is $900,000 your reimbursement will increase by $117 per month, or $1,404 per year.

“While this rate change will not have a material impact on the borrowing power of first-time home buyers, all borrowers should consider higher repayments in the months and years ahead,” he said. Finspo chief executive Angus Gilfillan told NCA NewsWire.

“However, if rates continue to rise, it will have an impact on borrowing capacity.

“Rate changes like this can create opportunities in the market, so now is a great time to speak to a home loan expert.”

RateCity.com.au research director Sally Tindall said the rise marked the end of an era for the Australian exchange rate.

“At 0.35%, the cash rate is still incredibly low, but there are a lot more rises around the corner,” she said.

“Money is going to start getting more expensive to borrow – and fast.

“We expect the majority of banks to pass today’s hike in full to borrowers, however, some lenders may choose to keep some of their lower rates on the table for new customers.”

Ms Tindall said people with a variable mortgage rate should find out what their bank was planning and benchmark it against the competition.

“Right now, there’s a 1.13 percentage point spread between the average existing variable rate and the lowest rate,” she said.

“If you can get a full percentage point on your rate now, you could protect yourself against the next four cash rate hikes.”

CreditorWatch chief economist Anneke Thompson said the RBA would now look forward to ABS wage price index data and average earnings in the national accounts to decide its next move.

“Even if the upcoming wage data shows an increase from the current growth rate of 2.3%, it is almost impossible for it to come close to the latest inflation figure of 5.1%,” she said. .

“That means the data is almost certain to show that real incomes are falling.

“Nevertheless, the RBA will take comfort if it sees at least some momentum gaining in wage growth.

“If we see growth in wage prices with a three ahead, that could prompt the RBA to move the cash rate more aggressively, to try to get the inflation spiral under control faster.”

Finance Brokers Association of Australia chief executive Peter White said past experience showed some banks would take the opportunity to maximize profits at the expense of mortgage holders.

“It is imperative that banks do not raise rates outside of cost of funds increases, as many Australians cannot afford sudden and steep rate increases,” he said.

“If the banks see this as a green light to start raising consumer lending rates higher than they should, it will backfire and create a bigger problem.”

Sarah Megginson, money editor at Finder, said rising rates would likely lead to further increases in home loans.

“This rate hike, coupled with a housing market that’s starting to cool, means some recent buyers could be caught off guard now — or when their fixed rate ends,” she said.

“If your rate has jumped or looks set to do so, it might be time to buy a home loan and find a better interest rate.”

Founder and director of the Curtin University Tax Clinic, Annette Morgan, told NCA NewsWire that people should look around different financial institutions and compare their products on rates.

Besides home loans, people should also look at their personal loans, credit cards and other forms of debt which were often at higher interest rates.

“They might consider consolidating all their debts into one or into their home loan if they have enough equity in their home to do so,” she said.

“This of course means you pay off debts over a longer period of time, but the benefit is only one payment per month and at a generally much lower interest rate.”

Ms Morgan also recommended people check out their service providers – including electricity, gas and various insurances – to see if there were any savings to be made by switching policies or providers.

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