Warning: How a potential increase in interest rates will impact your monthly mortgage payments

Australian borrowers are set to experience significant increases in their monthly mortgage payments following a decision by the Reserve Bank to raise the cash rate by 0.25%. Additionally, indications suggest that more rate hikes may be on the horizon.

The RBA’s first rate increase since November 2010 ends the era of a record-low 0.1 per cent that began in November 2020.

Governor Philip Lowe has hinted at ‘further increases in interest rates’ in coming months following the first election campaign rate rise since 2007.

Three of Australia’s Big Four banks are expecting a two per cent cash rate by 2023 – which would mean seven more rate rises within a year.

This recent rate adjustment has brought the cash rate to 0.35%, marking the highest it has been since March 2020 during the outset of the pandemic. The move signifies a potential challenge for borrowers managing home loan repayments.

This was much higher than the 0.15 percentage point increase financial markets were expecting. 

Australian borrowers face big increases in their monthly mortgage bills, after the Reserve Bank raised the cash rate by a quarter of a percentage point and hinted at more (pictured is an auction at Hurlstone Park in Sydney last year)

Inflation in the year to March surged by 5.1 per cent, the fastest pace since mid-2001 a year after the 10 per cent GST was introduced.

With inflation well above the RBA’s two to three per cent target, Dr Lowe gave a strong indication there would be more rate rises in 2022 and 2023 as Russia’s Ukraine invasion threatens to keep petrol prices elevated.

‘We expect further increases in interest rates will be necessary in the months ahead,’ he said.

‘If interest rates were to remain unchanged, inflation would be substantially higher.’

More than 1.5million borrowers will be coping with a variable mortgage rate increase for the first time. 

A borrower with a typical $600,000 loan – on a low 2.29 per cent variable rate – would see their monthly repayments rise by $78 from $2,306 to $2,384 should their bank pass on the RBA increase in full, taking their variable rate to 2.54 per cent.  

Three of Australia’s Big Four banks – ANZ, Westpac and NAB – also expect the Reserve Bank to take the cash rate to two per cent by 2023 as rates increase seven more times, with more pain possibly coming in June.

Westpac and its subsidiary St George were the first bank to hint at an increase in variable mortgage rates. 

CommSec chief economist Craig James said savers would benefit as borrowers were punished.

‘While bad news for borrowers, an increase in interest rates represents good news for the nation’s depositors,’ he said.

‘And certainly more Australians have been squirreling away cash over the past few years.’

The cash rate has risen by 0.25 per cent basic points, ending the historic era of a record-low 0.1 per cent cash rate and marking the first increase since November 2010. This was also much bigger than the 0.15 percentage point rise financial markets were expecting

Last month, the RBA predicted an increase in the cash rate to two per cent – a level unseen since May 2016, would cause a 15 per cent plunge in Australian property prices. 

CoreLogic research director Tim Lawless is expecting Sydney and Melbourne house prices to dive by 15 per cent in the year ahead, as interest rates keep rising.

‘Most of the declines will be concentrated in those two cities because that’s where affordability is most stretched and also where, arguably, they’ll be facing some demographic headwinds just through interstate migration really favouring the smaller states,’ he told Daily Mail Australia. 

‘The counter argument to that is we see overseas borders opening up, we’re going to be seeing more migration coming in but that generally tends to flow through to rental demand rather than purchasing demand.’ 

CoreLogic research director Tim Lawless is expecting Sydney (pictured) and Melbourne house prices to dive by 15 per cent in the year ahead, as interest rates keep rising

Brisbane, Adelaide, Hobart and Canberra, along with regional areas in coastal New South Wales, southern Queensland and northern Tasmania were likely to see smaller declines of five to 10 per cent.

‘These markets tend to be a little bit more insulated partly because affordability is not quite as stretched,’ Mr Lawless said.

Those markets are more affordable than Sydney and Melbourne and would continue to benefit from professionals who can work from home moving there.

A 15 per cent fall in Sydney’s median house price of $1.417million would take values back to $1.204million – where they were in the middle of last year.

A drop of the same magnitude in Melbourne would see the mid-point house price drop from $1.001million to $850,787, which would be the lowest level since May 2017.

But with unemployment at just 3.95 per cent, the lowest level since 1974, Mr Lawless said forced sales would be unlikely.

‘This will probably more a lack of demand and people looking to sell having to adjust their price expectations,’ Mr Lawless said.