Morphett Vale RLA 144653 Blog

After more than a decade of interest rate cuts, the Reserve Bank has hiked the official cash rate to 0.35%, but according to several experts from Raine & Horne, homeowners shouldn’t expect the sky to fall in any time soon. 

At its meeting today, the RBA Board decided to increase the cash rate target by 25 basis points to 35 basis points[i].

Angus Raine, Executive Chairman, Raine & Horne, said, “The Australian Central Bank last increased the official cash rate on 3 November 2010. To put this into a historical perspective, Julia Gillard was the Australian Prime Minister at the time of the last rate rise. 

“However, whether it is a 0.25% or a 0.40% increase, the lenders currently apply a buffer of 3.0 percentage points to your interest rate when calculating a borrower’s ability to service a home loan.”

Craig Betalli, Senior Finance Specialist at Raine & Horne’s financial services division, Our Broker, said most banks had assessed borrowers’ capacity at around 6% interest rates. “We are expecting that the banks will increase these buffers.”

Still better off than November 2010

Craig Betalli says borrowers are still clearly better placed than when the RBA last tightened monetary policy, with the cash rate increasing to 4.75% almost 12 years ago. He said, “With rates falling to a historical low of 0.10% due to the pandemic, people who were unaffected by COVID lockdowns used the lower rates and additional borrowing capacity to upgrade or improve their homes. Also, first home buyers and investors have all been active in the market.”

According to Craig, with more Australians now carrying more borrowings, the Reserve Bank will hesitate to make significant changes to monetary policy. “It will be difficult for the RBA to ramp up interest rates to control inflation, as substantial increases will hurt borrowers and the economy. Therefore, any talk of significant interest rate increases would seem wide of the mark.” 

“It’s fair to expect two to three interest rate increases before Christmas, which will be it for a period.”

Craig added, “The RBA is reacting to the surge in inflation to 5.1% last month[ii], and this increase might be a once-off caused by international factors upsetting supply chains rather than increased consumer demand. Simply put, price increases in fuel, building materials and meat are a function of supply rather than consumer demand. It will be interesting to see if the next quarter’s CPI figures hit the same levels again or start to trend down.” 

If you would like to discuss the impact of an increase in the official cash rate on your mortgage, contact Our Broker today for an obligation-free home loan stress test on 1800 913 677.

[i] https://www.rba.gov.au/media-releases/2022/mr-22-12.html

[ii] https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release