Hike rates

RBA set to hike rates on Melbourne Cup day for second time in more than a decade

It’s called the race that stops the nation, but this year it may be the rates that are stopping the nation’s spending in its tracks.

The Reserve Bank of Australia is largely expected to raise interest rates at 2:30 p.m. Tuesday afternoon, particularly following inflation figures higher than expected the previous week.

The last time the central bank moved to raise rates on Cup day was in 2010, when after five months of pauses the country’s top economists announced a 25 basis point hike to 4 .75%.

This afternoon’s decision – at least from market experts – is not so clear cut.

Many expect the RBA to continue its hikes of 25 basis points, to bring the current cash rate to 2.85%.

RBA Governor Philip Lowe (9News)

But others are predicting much worse: an increase of 50 basis points could be envisaged to serve as a “stop gap” for inflation.

Whatever the decision, the biggest issue affecting borrowers is not the monthly increase, but the estimated $99 billion in fixed-rate mortgages between July and December next year.

“Borrowers who have locked in ultra-low fixed rates could see their repayments skyrocket by up to 65% at the end of their fixed term,” said Sally Tindall, research director at RateCity.com.au.

“People on a fixed rate shouldn’t stick their heads in the sand, but rather do what they can.

“Instead of dreading your fixed rate ending, consider testing your budget now by making those higher repayments while your rate is still low.”

2010: Another French, American horse triumphs, paying $13.
The American won the Cup in 2010, just 45 minutes after the RBA raised their rates.

If the average homeowner with a $500,000 loan fixed their rate in July 2021 for two years, they would pay around 1.94%.

When that rate ends in July next year – using an average return rate of 7.18% – if the same borrower did not negotiate with their lender, they could face a 65% increase in payments or at $1,365 more per month.

RateCity.com.au analysis shows that even those who negotiate could be looking at an extra $1,000 a month when they leave their fixed rate mortgage.

Tindall said it was up to borrowers to prepare for the financial reality that awaited them.

“Fixed rate borrowers should stay alert as they approach the end of their term. Put a note in your journal at least two months before the end of your fixed term, so you can start looking for a better deal,” she says.

“Lenders are hungry for refinancers and will continue to put higher rates on the table for borrowers willing to make the switch.”

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