After the first cash rate hike in more than a decade, lenders were quick to pass the rate hike on to borrowers, with 95% of lenders raising interest rates by 0.25% according to Canstar.
The average rate increase of 0.25% saw monthly repayments on a 30-year loan increase from $52 to $2,154 per month for a $500,000 loan with more difficulty for borrowers.
The Reserve Bank of Australia is widely expected to raise the exchange rate again this month, with ANZ forecasting a 40 basis point jump.
Canstar financial expert Steve Mickenbecker said he expects the RBA to continue to tighten, which will put pressure on borrowers.
“With nearly all 96 lenders on Canstar.com.au having raised rates, by an average of 0.25%, borrowers are already feeling the pinch,” Mr Mickenbecker said.
“Unfortunately, the first increase in repayments in 11 years is just a taste of what is to come and warns borrowers that now is the time to prepare financially as best they can.”
According to Canstar, on May 1 before the cash rate hike, the lowest variable rate available was 1.58%, but on June 1 it is now 1.83%, a difference of 0.25% .
The expectation for tomorrow (June 7) is at least another 0.25% increase in the cash rate, which would add another $52 per month to repayments for those with a $500,000 loan according to Canstar.
If the RBA were to increase by 0.4%, those same borrowers would be hit with $111 a month in additional repayments.
Mr Mickenbecker said borrowers should start preparing in case the RBA hits its terminal rate of 2.5%.
“A projected cash rate of 2.5% in a few years adds $681 to the monthly repayments of a $500,000 loan,” he said.
“It’s too late to start planning for this when you’re faced with a monthly bank bill of $2,783 after your repayments have already increased.
“There are still eight loans below 2% and borrowers need to refinance on a lower basis before further interest rate hikes materialize.
“The other part of the plan, once you’ve gotten a lower rate, is to set aside the repayment savings to get the loan sooner than expected, which will help you when the going gets tough.”
While the pressure will mount on borrowers, the silver lining is that savers could finally start to see higher interest on their term deposits, according to Mickenbecker.
“There are green shoots of hope for savers that they will start to see better returns in years to come as banks chase retail savings,” he said.
“But the start has been slow, with just 47% of banks on Canstar.com.au raising savings interest rates in May and 81% raising term deposit rates.”
Mickenbecker said that while average savings rates remained low, it was still worth chasing the highest rates available to seek the best return.
“Rate increases have been split between the base rate, promotions and bonuses, making general rates a mere guide,” he said.
“Savers should ensure they can meet the bonus requirements and be prepared to transfer their account to another bank at the end of a four or five month promotional period.”