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Well, it finally happened. After 11 and a half years old cuts, the Reserve Bank of Australia (RBA) raised the national cash rate at its meeting in early May 2022. With the RBA attempting to rein in inflation which has recently spiked not seen since the 1990smore spot rate increases are likely to occur over the next 12 months.
So what does this mean for Australian borrowers and savers?
What is the cash rate and why is it rising so high?
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 needed to provide financial products and services, including loans.
The cash rate is one of many factors that affect interest rates. When the cash rate is low (as it has been for several years), borrowers pay less interest on loans (including mortgages and car loans) while savers earn less interest on their assets (savings accounts and term deposits).
With the RBA finally raising the cash rate, borrowers may soon have to start budgeting for higher loan repayments as banks and lenders begin to pass on cash rate changes. Australian savers can also expect to start earning more interest on their savings in the future.
Australian mortgage holders may soon start to feel the pain as banks begin to raise their variable interest rates on home loans. Many Australians who have already stretched their finances take out larger home loans to afford higher housing pricesthis could expose many borrowers to the risk of mortgage stress.
Fixed rate mortgage holders may not be completely off the hook either. While a fixed rate can keep your repayments consistent for easier 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 tenure, you could risk incurring an astronomical bill when you return.
Borrowers with equity available in their home may be able to refinance with a bank or mortgage lender that offers a more affordable interest rate if they believe they might be at risk for mortgage stress. . Keep in mind that fixed-rate borrowers may incur high break-up fees if they refinance during their fixed-rate term.
Some of the best home loans for refinancing include:
If you currently have a car loan, the rise in the RBA cash rate may only affect your repayments if you are paying a variable interest rate. But if you’re shopping for cars and looking for a car loan, variable and fixed rates could potentially start to rise after the RBA’s decision. This means you may have to budget for higher interest charges as well as the higher cost of new and used cars, thanks to car shortage.
Some of the best used car loans include:
Savings accounts and term deposits
You may not have heard much about the world of savings accounts and time deposits in recent years, because for much of that time, just not much happened. . With low interest rates, it was not easy for Australians to grow their wealth by putting their money in a savings account or term deposit to earn interest, leading many looking at other investments, from stocks to crypto.
However, interest rates on savings accounts and time deposits may also increase as banks pass on RBA cash rate hike, with some lenders already announcing rate hikes. This could help make keeping money in the bank to earn interest a more viable strategy for building wealth over time.
Some of the best regular savings accounts include:
Some of the best term deposits include:
If you want more information on what’s happening in the world of interest rates and cash rates, check out our explainer on what it can mean for you here.