What does an increased cash rate mean for me?


On the 3rd of May 2022, the Reserve Bank of Australia (RBA) announced that the cash rate will be increased by 25 basis points, taking the cash rate from 0.1% to 0.35%. After more than 10 years of the cash rate going down or staying the same, the move shocked many of us.

During the announcement,  the RBA governor Philip Lowe said:

“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."

So while the decision was made in the best interests of the Australian economy, and certainly wasn't entirely unexpected, it still managed to surprise a lot of us. But what does an increased cash rate mean for me? And how will it change my loan repayments?

What is the cash rate?

In case you're not entirely sure what the RBA cash rate is, the cash rate is the rate that the charges banks when they borrow money. When the cash rate goes up, it costs more for banks to borrow and this is passed onto you, the customer, in the form of increased interest on loan repayments.

The RBA holds the responsibility of providing services to both the Australian Government, as well as other central banks and financial institutions. The RBA's board is designed to ensure that the bank's monetary and banking policy is used to help the Australian population, helping stabilise the Australian economy and assist with the economic prosperity and welfare of Australians.

What is the impact of the increased cash rate?

The increase of the cash rate from 0.10 to 0.35 means that you may earn more interest on your savings but also end up paying more interest on your loans. There is often a delay in the increase on savings rates and there might not even be an increase of 0.25% from all providers.

Since the RBA's announcement, the Commonwealth Bank of Australia have responded with an official statement announcing an increase of 0.25% p.a. in their home loan variable interest rates effective May 20, 2022.

Now, let's talk home loan examples:

If you have a home loan of $500,000 with a 2.5% interest rate over 25 years, you're probably paying $2,253 per month.

If you have a 25 year home loan of 500,000 with a 2.75% interest rate you're probably paying $2,317 per month.

That's a monthly increase of $64, or over the lifetime of the loan, a $19,200 difference ignoring any future rises, inflation, or additional fees.

Check the potential change in your mortgage repayments using the Government funded MoneySmart site. And most importantly, organise a chat with your loan provider to discuss the impact on your repayments.

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Disclaimer: The author is not a financial advisor and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs, or financial situation.

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