The Reserve Bank of Australia (RBA) has hiked the official cash rate by another 25 basis points to 2.60%. How much will this rate hike increase your monthly mortgage repayments, and when will it kick in?
It's hard to believe that at the beginning of May the cash rate was just 0.10%. Today it was increased for the sixth straight month to 2.60%.
The 25 basis point increase surprised many economists who were predicting a fifth straight 50 basis point rise.
However, it's worth noting the cash rate hasn't been this high since July 2013; almost ten years ago.
RBA Governor Philip Lowe said in a statement further increases were likely to be required over the period ahead.
"The cash rate has been increased substantially in a short period of time. Reflecting this, the Board decided to increase the cash rate by 25 basis points this month as it assesses the outlook for inflation and economic growth in Australia," said Governor Lowe.
How much extra will your mortgage be each month?
Unless you're on a fixed-rate mortgage, the banks will likely follow the RBA's lead and increase the interest rate on your variable home loan soon.
Let's say you're an owner-occupier with a 25-year loan of $500,000 paying principal and interest.
This month's 25 basis point increase means your monthly repayments could increase by almost $75 a month. That's an extra $685 on your mortgage compared to May 1.
If you have a $750,000 loan, repayments will likely increase by about $110 a month, up $1030 from May 1.
Meanwhile, a $1 million loan will increase almost $150 a month, up $1,380 from May 1.
So when exactly will this latest rate rise kick in?
Ok, so once the RBA hikes the official cash rate, your bank will usually announce its own interest rate hike (and have its own notice period) for variable rates in the days to come.
We'll run you through a quick example.
Let's say your monthly mortgage repayments are made on the 20th day of each month.
Let's also assume you receive a notice from your lender this Friday (October 7) of their own subsequent rate increase, with a 30-day notice period.
By the time October 20 arrives, you won't be paying higher repayments, as the full 30 days notice would not have passed.
When that 30 days notice finishes on November 6, the daily interest rate you're charged would increase to the new amount.
That means when your monthly repayment on November 20 rolls around, you'd be charged at the new, higher rate (but calculated only from November 6).
By the time December 20 arrives, the monthly repayment amount you're charged would fully reflect the new rate.
Worried about your mortgage? Get in touch
If you're starting to feel the pinch and are worried about what interest rate rises might mean for your monthly budget, feel free to contact us today.
Some options we can help you explore include refinancing (which could include increasing the length of your loan to decrease monthly repayments), debt consolidation, or building up a bit of a buffer in an offset account ahead of more rate hikes.
If you're worried about how you'll meet your repayments in the months ahead, give us a call today. We'd love to sit down with you and help you work out a plan moving forward.
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