As reported in the past few weeks,the RBA has raised the official cash rate by 25 basis points to 3.1%, the eighth increase in as many months, resulting in rising home loan interest rates. This can affect even borrowers with fixed-rate home loans in a few different ways.
How does the cash rate hike set by the RBA affect mortgage rates?
The cash rate is the benchmark interest rate set by the Reserve Bank of Australia (RBA). It is used by banks and other financial institutions as a reference point for determining the interest rates they charge on loans and other financial products, including mortgages.
When the RBA increases the cash rate, it may become more expensive for banks and other financial institutions to borrow money. As a result, they may pass on some of this increased cost to borrowers by raising the interest rates on their home loan products, including mortgages. This means that mortgage rates could go up, which would result in higher monthly repayments for borrowers.
It's important to note, however, that the RBA's cash rate is just one factor that can influence mortgage rates. Other factors that may affect mortgage rates include market conditions, the lender's own business objectives, and the specific terms and conditions of the home loan product.
Variable interest rates vs fixed interest rates
A variable interest rate is an interest rate that can fluctuate over time, in response to changes in a specified benchmark interest rate index. This means that the interest rate on a home loan with a variable interest rate will change as the benchmark rate changes. For example, if the Reserve Bank of Australia (RBA) increases the official cash rate, the interest rate on a home loan with a variable interest rate may also increase. Variable-rate home loans may offer borrowers some flexibility, such as the ability to make extra repayments or access redraw facilities, which allow you to withdraw any extra repayments you have made.
On the other hand, a fixed interest rate is an interest rate that remains the same over a certain period of time. If you have a home loan with a fixed interest rate, the rate you pay on the loan will not change, no matter what happens to the benchmark interest rate. This can be beneficial because it allows you to know exactly what your interest payments will be, which can help you plan and budget more effectively. However, if market interest rates fall during the fixed rate period, you may end up paying more in interest than you would have with a variable-rate home loan.
Essentially, a variable interest rate can change over time, while a fixed interest rate remains the same for a certain period of time.
What are my options when my fixed-rate period is up?
- Stay on the variable rate:
If you can still afford your mortgage repayments after switching to a variable rate, you might be able to keep your current mortgage. Keep in mind that future rate hikes could also result in mortgage stress.
- Refinance to a new fixed rate:
If you are comfortable with the stability of fixed repayments, you may want to consider refinancing to a new fixed-rate home loan. This will allow you to lock in a fixed interest rate for a set period of time, which can provide some certainty about your repayments.
- Shop around for a better deal:
It may be worth comparing different lenders to see if you can find a better deal. With our help finding the right loan, you may be able to find a home loan with a lower interest rate or more favourable terms and conditions.
- Seek expert advice:
If you are unsure of what to do, it may be worth speaking with our friendly mortgage specialists and advisers to discuss your options and explore strategies for managing your finances in a changing economic environment. We can help you understand the different home loan products available and advise you on the best course of action for your situation.