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A guide to rising interest rates for Aussie borrowers

14 June 2022 | 6 min read
The cost of living is on the rise. Borrowers across Australia will see mortgage repayments increasing after the Reserve Bank of Australia lifted the cash rate for the first time in 11 years in May, and then again in June. Here’s what the future holds for everyday mortgagees.

The cash rate increase was prompted by stronger economic demand than the RBA had predicted, and rising inflation. The rising cost of goods and services affecting Australian households is clear evidence of a sharp increase in CPI (Consumer Price Index) and core inflation, which the RBA is working to stabilise.

Increased consumer spending in a post-lockdown environment has seen core inflation soar well beyond the RBA’s target of 2-3%. It’s now predicted to reach 5% by the end of the year. For this reason, further cash rate increases are expected.

David Robertson, head of economic and markets research, Bendigo Bank, anticipates the RBA cash rate will continue climbing. Primarily in 0.25 % increments (although probably 50 basis points in July) over the coming months reaching 2% by November, and as high as 2 ½ % early next year.

Australia isn’t alone in its rising cash rate, either. The US Federal Reserve, Bank of Canada and Reserve Bank of New Zealand have just lifted rates by another ½ %. The RBA have been at the back of the queue, but it’s moving quickly now.

How will the cash rate affect my mortgage repayments?

The latest increase of 50 basis points brings the cash rate to 0.85%, which will have a flow on effect on home loan repayments as variable rates increase.

For Bendigo and Adelaide Bank home loan customers on a Variable Rate Loan the interest rate will increase by 0.50% p.a. as of 17 June. The average mortgage of $500k will see an increase of approximately $130 per month. This is why it’s important to keep on top of things, because $130 per month could mean a further increase of $910 per month by the end of the year.

But, in good news for savers, the Bank will also increase the interest rate on many of its deposit products. This includes an increase to the rate on its Reward Saver account by 0.50% p.a.

Do higher interest rates mean bad news?

While rising rates alongside the rising cost of living will put pressure on Australian households in the short to medium term, rate hikes actually indicate a more positive economic outlook. The rate increase aims to reduce inflation and stabilise inflationary increases to the cost of living that many of us are experiencing. With the cost of groceries, petrol and everyday expenses increasing, a rate rise aims to bring this under control.

From an economic perspective, rising interest rates indicate a strong economy – but their timing is challenging with the cost of living on the rise. The aim of rising rates is to balance out increased spending and prevent a ‘boom or bust’ scenario. This is where rapid growth leads to a sharp economic downfall. David Robertson explains that Australia’s economic strength will bolster the impacts of higher rates.

“Fortunately our economy looks well positioned to cope with slightly higher rates. The inflation and energy shock, and broad commodity price surges are still volatile and unpredictable in nature. But Australia should cope better with these conditions than many countries.”

What action can I take following the interest rate increase?

Now is the time to look at your current mortgage rate and consider the impact to your household budget. Remember that small increases do add up.

It could be a great time to discuss fixed rate options with your banker. With more rate hikes expected, locking in a low rate could stabilise your repayments. It could give you some certainty around your outgoings in an otherwise uncertain interest rate environment and take a weight off your mind as rates continue to climb.

If you’re in the process of buying a home, Fixed Rate Lock may be available to give you some certainty around your interest rate post settlement. Bendigo Bank Mobile Relationship Manager, Adam Williams, explains, “Fixed Rate Lock is when the customer pays a fee to secure the fixed rate for a period of up to 90 days to protect them from rate fluctuations between purchase and settlement.”

“For example if you sign your loan offer with a rate of 3% p.a. but you have a 60 day settlement, potentially there could be an increase each month meaning at settlement your rate has increased to 3.5% p.a.”

Speak to your lender for more information on available rates and how to manage the impact of rising rates on your household.

Any advice provided in this is of a general nature only and does not take into account your personal needs, objectives and financial circumstances. You should consider whether it is appropriate for your situation. Please read the applicable product disclosure statement(s) on our website before acquiring any product.

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Bendigo and Adelaide Bank Limited, ABN 11 068 049 178 AFSL / Australian Credit Licence 237879. Any advice provided on this website is of a general nature only and does not take into account your personal needs, objectives and financial circumstances. You should consider whether it is appropriate for your situation. Please read the applicable Disclosure Documents before acquiring any product described on this website. Please also review our Financial Services Guide (FSG) before accessing information on this website. Information on this page can change without notice to you.

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