Australia's cash rate rose for the first time in over a decade.
The Reserve Bank of Australia lifted the cash rate by 0.25 percentage points in May 2022, moving it from 0.10% to 0.35%. It was the first RBA cash rate rise since November 2010.
For homeowners on variable rate home loans, this meant higher repayments almost straight away. All four major banks passed on the full increase within two weeks of the RBA decision.
If you hold a variable rate home loan, here is what the change means for your repayments, your borrowing capacity, and the steps you can take to stay ahead.
Why rates rose
The RBA held rates at a record low of 0.10% throughout the pandemic to support the economy. By early 2022 the picture had shifted. Inflation was climbing, unemployment was falling and wages were picking up.
The RBA board decided it was time to start withdrawing the emergency settings put in place during COVID-19. The 0.25% increase was framed as the beginning of a process of normalising monetary conditions, not a sudden shock to borrowers.
Most economists at the time expected several more rises across 2022, with the cumulative increase likely to reach between 1.2 and 1.4 percentage points before the cycle ended.
The Big Four banks
All four major banks passed on the full 0.25% rise within two weeks of the RBA decision. Here is when each bank applied the change to variable rate owner-occupier loans:
Smaller lenders and non-bank lenders moved at similar speed. If you were on a variable rate at the time, your lender will have notified you in writing with your new rate and updated repayment amount. Check that notice carefully to confirm the effective date and the new figure.
Impact on repayments
A 0.25% rise sounds small, but it adds up quickly on a large loan balance. On a $600,000 home loan, the monthly repayment increase was around $75 per month, or roughly $900 per year.
Here is a rough guide to what the May 2022 rate rise added to monthly repayments on a 30-year loan:
Use the loan repayment calculator to work out the exact dollar impact on your current balance and remaining loan term.
Effect on borrowing power
Rate rises do not only affect existing borrowers. They also reduce how much prospective buyers can borrow.
Lenders calculate your borrowing capacity by applying a serviceability buffer above the current rate. When rates rise, the buffer moves up too, which lowers the maximum loan amount a lender will approve.
As an example, a couple on a combined income of $150,000 might have qualified for around $830,000 before the rate rise cycle began. After a 1.3 percentage point increase, that same couple could find their maximum drops to around $735,000. That is a reduction of nearly $100,000 in buying power.
Our guide on why borrowing power declines during rate cycles covers this in more detail and explains what you can do to rebuild your position.
What to do now
Rising rates are not something you simply have to absorb. There are real steps you can take to reduce the pressure on your budget.
Not sure whether to act now or hold off? Read our article on whether to refinance now or wait to help you decide.
Common questions
Q: Does the rate rise affect my fixed rate home loan?
No. If you are currently on a fixed rate, your repayments stay the same until the fixed term expires. Once it ends, your loan typically rolls to the lender’s variable rate, which will reflect conditions at that time. If your fixed term is ending soon, review your options before the automatic rollover kicks in.
Q: Will there be more rate rises after May 2022?
At the time of the May 2022 decision, the RBA was clear this was the start of a tightening cycle. Most economists expected several further rises over the following 12 months. If you are on a variable rate, planning for continued increases is more prudent than hoping the cycle ends quickly.
Q: I am buying a property. How does this affect my borrowing limit?
It likely reduces it. Lenders apply a serviceability buffer above the current rate when assessing your capacity to repay. When the cash rate rises, that buffer moves up too, lowering your maximum approved loan amount. Speaking to a mortgage broker is the fastest way to find out exactly where your borrowing capacity sits right now.