Well, it finally happened. After 11 and a half years of cuts, the Reserve Bank of Australia (RBA) raised the national cash rate at its meeting in early May 2022. With the RBA attempting to slow inflation that recently reached highs not seen since the 1990s, it’s likely that more cash rate hikes may be arriving over the next 12 months.
So what does this mean for Australia’s borrowers and savers?
What is the cash rate, and why is its hike a big deal?
The national cash rate is the interest rate that banks and other lenders charge each other for overnight cash loans, which they use to access the cash required to provide financial products and services, including loans.
The cash rate is one of several factors that affect interest rates. When the cash rate is low (like it has been for the past several years), borrowers are charged less interest on loans (including mortgages and car loans) while savers earn less interest on their wealth (in savings accounts and term deposits).
With the RBA having finally raised the cash rate, borrowers may soon have to start budgeting for higher loan repayments as banks and lenders start passing on the cash rate changes. Australian savers may also be able to expect to start earning more interest on their savings in the future.
Australian mortgage holders may soon start feeling the pain as banks start raising their variable home loan interest rates. With many Australians having already stretched their finances to take out larger home loans to afford higher housing prices, this could leave many borrowers at risk of mortgage stress.
Mortgage holders on fixed rates may not be completely out of the woods either. While a fixed rate can keep your repayments consistent for simpler budgeting, your mortgage will automatically revert to a variable rate at the end of the fixed term. And if variable rates experience multiple increases during your fixed term, you could risk experiencing bill shock when you revert.
Borrowers with equity available in their homes may be able to refinance to a bank or mortgage lender that offers a more affordable interest rate if they think they could be at risk of mortgage stress. Keep in mind that borrowers on fixed rates may need to pay hefty break fees if they refinance during their fixed rate term.
Some of the top home loans for refinancing include:
If you currently have a car loan, the RBA cash rate hike may only affect your repayments if you’re paying a variable rate of interest. But if you’re shopping for cars and are in the market for a car loan, both variable and fixed rates could potentially start to increase following the RBA’s decision. This means you may need to budget for higher interest charges as well as the higher cost of new and used cars, thanks to car shortages.
Some of the top used car loans include:
Savings accounts and term deposits
You may not have heard much from the world of savings accounts and term deposits for the last few years, because for a lot of that time, there simply wasn’t that much happening. With interest rates on the low side, it wasn’t easy for Australians to grow their wealth by putting their money into a savings account or a term deposit to earn interest, leading to many looking at other investments, from shares to crypto.
However, interest rates on savings accounts and term deposits may also rise as banks pass on the RBA cash rate hike, with a few lenders already announcing rate rises. This could help make keeping some cash in the bank to earn interest a more viable strategy for growing wealth over time.
Some of the top regular savings accounts include:
Some of the top term deposits include:
If you want more insight into what’s going on in the world of interest rates and cash rates, check out our explainer on what it may mean for you here.