At its meeting on the 3rd May 2022, the Board decided to increase the cash rate target by 25 basis points to 35 basis points. The first rate rise in more than a decade! It also increased the interest rate on Exchange Settlement balances from zero per cent to 25 basis points.
The Board judged that now was the right time to begin withdrawing some of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic. The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected. Given this, and the very low level of interest rates, it is appropriate to start the process of normalising monetary conditions
Borrowers have enjoyed record low rates for many years however big banks now predict the official interest rate to rise by between 1 and 2 percentage points within the next two years, which could push typical variable rates to between 4 and 5 percent.
Buyers looking to enter the property market could see a reduction in their borrowing power as a result of the cash rate rise.
When banks approve home loan applications, they assess borrowers’ ability to repay their home loans at an interest rate several percentage points higher than the mortgage rate, known as the assessment rate.
With interest rates and mortgage repayments now rising, some potential borrowers may see a reduction in the maximum amount of money they could otherwise have borrowed, as lenders look to ensure that borrowers will be able to continue repaying their home loans, even at higher interest rates.
What can you do?
Review your current loan –
Some lenders are still offering attractive rates so it the opportune time to talk to your broker about whether your current interest rate and loan structure are still right for you to ensure you are in the best position before rates rise.
Enquire before your fixed term expires –
You don’t have to wait for your fixed rate term to expire to enquire about your options upon expiry, there are no negative implications to reviewing your loan while your fixed rate is still in progress, but, you may be negatively impacted if you wait to review your loan and in that time interest rates rise.