RBA cash rate: Loan repayment calculator as Reserve Bank of Australia considers interest rate hike
Australians are bracing for an almost guaranteed rise in interest rates following a spike in inflation.
Last Wednesday, the Australian Bureau of Statistics announced that inflation had reached 5.1%, its highest level in more than 20 years.
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This was spurred by mounting cost of living pressures, primarily soaring gasoline prices and home construction.
On Tuesday, the Reserve Bank of Australia will announce whether the spot rate, which currently stands at 0.1%, will be raised.
What does this actually mean?
Simply put, rising interest rates make borrowing more expensive.
This means that for people with a mortgage, their repayments are higher.
But it can also lead to higher returns on savings and on retirement, both of which generate interest on growth, according to Peter Swan, professor at the UNSW business school.
The RBA uses interest rates to manage inflation rates.
When borrowing becomes too expensive, the demand for goods and services may decline, lowering the overall cost.
ANZ was the first of the big four banks to call for a cash rate hike.
“Inflationary pressures have grown and widened,” he tweeted last week.
“A cash rate target of 0.1% is inappropriate in this context.”
He predicted that the RBA would raise the cash rate by 0.15%.
Cash Rate Calculator
While it’s unclear exactly how much the RBA would raise the cash rate, financial markets are forecasting a rise of 0.15% to 0.25%.
According to the Mortgage Rate Change Calculator Mozosomeone with a loan principal and interest of $500,000 with 25 years remaining would pay $40 more per month on their mortgage if the RBA raised the cash rate by 0.15%, their bank’s interest rate going up from 3.1% to 3.25.
A person with the same conditions, but with a loan of $750,000, would pay $59 more per month, while a person with a loan of $1,000,000 would pay $79 more per month.
To calculate your rate change, click here.
If the RBA were to raise the cash rate on Tuesday, it would be the first time in a decade.
And with a federal election looming, the decision could become more political than financial.
HSBC chief economist Paul Bloxham said the RBA’s move could put it in the eye of a political storm.
“The RBA is independent and will no doubt act as it sees fit to achieve its mandate,” he said.
“But raising the exchange rate 18 days before an election – the first hike in more than a decade – would put the RBA right in the political mix.”
The last time the interest rate was raised during an election campaign was in 2007, a poll that former Liberal Prime Minister John Howard lost after campaigning on lower interest rates under his government.
Prime Minister Scott Morrison said people weren’t worried about the politics of the economy, they were worried about their mortgages.
“That’s what worries me,” he told reporters.
“I mean, sometimes you guys (journalists) always see things through a totally political lens. I do not know. And Aussies don’t.
Three of the big four banks are predicting a cash rate hike on Tuesday, with Commonwealth Bank indicating it will be next month.
“What could happen is that the Reserve Bank decides to do nothing for another month,” CommSec’s Steven Daghlian told 7NEWS.
“It’s because in two and a half weeks we get a key wage growth update, we have the election after that, a key economic growth update in early June.”
Impact on young Australians
Young people who do not own a home are unlikely to be significantly affected by the RBA’s decision.
Economists and industry experts have told 7NEWS.com.au that the higher cost of a mortgage is unlikely to pass on to tenants.
“It’s a common misconception that higher interest rates will lead landlords to increase rents,” Cameron Murray, a researcher at the University of Sydney’s Henry Halloran Trust, told 7NEWS.com.au.
“And, of course, they can try that.
“But you have to remember that ultimately the rental price is determined by the rental market and not by the cost to landlords.
“We know that because most homeowners don’t have big mortgages, most homeowners make a lot of money, and only a few recent buyers may have big mortgages.”