What do rising interest rates mean for home loan repayments?

Why are interest rates rising?

Interest rates are rising in Australia because inflation is increasing. The Reserve Bank has lifted the cash rate in an effort to dampen demand for goods and services and contain rising prices.

Inflation has increased for a range of reasons. Globally, COVID has disrupted supply chains and the war in Ukraine has pushed the prices of energy and agricultural products higher. In Australia, a shortage of workers is driving wages up. The floods are also contributing to higher prices.  

Interest rates have been very low over the last few years to stimulate demand during the pandemic, but that emergency stimulus is no longer needed so rates are returning to more regular levels. 

What’s the impact of higher interest rates for people with mortgages?

When the Reserve Bank lifts the cash rate, it affects the cost of borrowing right through the economy. The interest rates on loans, such as mortgages, usually rise, meaning higher repayments. For example, the monthly repayments on a 30-year mortgage of $500,000 with an interest rate of 3.0% are about $2,108. Repayments increase to about $2,245 if the interest rate increases to 3.5%. 


What’s the difference between the cash rate and your loan rate?

The Reserve Bank is lifting the cash rate, which is the interest rate the banks charge when they lend money overnight to each other to meet their daily cash needs.  

Banks consider a range of factors when setting loan rates, but the cash rate is one key factor in their loan rate calculations. When the cash rate increases, variable home loan rates usually rise too, along with fixed rates on offer to their customers. 


What you can do if you’re worried about making higher mortgage repayments

If you’re concerned about being able to make your monthly mortgage repayments, there are some things you can do.  

One option is to move from a variable rate to a fixed rate. When you choose a fixed rate, your mortgage rate is set for a defined period, usually between one and five years. This gives you certainty. Fixed rates mean you’ll know exactly how much your repayments will be, making it easier to manage your budget. Your fixed rate won’t change even if interest rates go up during the period of the loan.  

When the fixed period ends, you can roll the loan over to a new fixed rate or move over to a variable rate loan. You have the option to fix all or just part of your loan amount. It’s important to remember that your repayments may increase sharply when the fixed rate ends if the variable rate has increased significantly during the period of the loan. 

It’s important to talk to your lender if you are experiencing financial stress or hardship. They may be able to offer you the support you need. 


What will cause interest rates to fall again?

Generally, interest rates will only begin falling once inflation is back at acceptable levels. The Reserve Bank expects this could happen in 2023. 

Use our calculator to see how higher interest rates could change your home loan repayments  


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