Bank of England raises interest rates - will the RBA follow suit in November?

The Bank of England recently raised interest rates in the UK for the first time in ten years, and Mozo Data Manager Peter Marshall has said Australia could be next in line for an increase.

According to Marshall, one of the things the RBA looks at when deciding monetary policy is the interest rates of comparable countries, like the UK or US, because it affects the flow of money into Australia.

Recent moves from both the Fed, which hiked rates earlier in the year and now from the Bank of England, which raised from 0.25% to 0.5%, mean the Reserve Bank of Australia may begin to look at a rate rise down under as well.

“Although rates in the US and UK don’t have a direct impact on Australia’s cash rate, when both The Fed and the Bank of England are increasing, lower investment flows into Australia help to keep the exchange rate lower and give the RBA scope to lift rates without damaging Australian exports,” Marshall said.

But don’t set your sights on a Melbourne Cup Day rate hike just yet. There are domestic factors that have a more direct impact on our monetary policy, which the Reserve Bank will need to keep a close eye on, including jobs figures, inflation, wages and housing affordability.

Marshall says that although many of these indicators are beginning to look up - jobs figures have been going well and wages are expected to pick up, though inflation remains below the desired level - the RBA isn’t likely to rush into any decision.

“In six months, if economic indicators are looking good and there are no major shakeups, the Reserve Bank will likely start feeling comfortable about moving rates up. But as usual, I’d expect a slow and cautious process,” Marshall said.

“By mid-next year, there’s a good chance we’ll have seen a rate rise.”

And if that happens, Aussie borrowers who bought into a red hot property market may have to plan for higher repayments on their home loans, because although banks don’t need to raise rates in line with the RBA, there’s every chance most lenders will.

Here’s a breakdown of how a 0.25% increase in interest rates might affect different borrowers’ home loan repayments:

$350k home loan over 25 years with a 90% LVR - The average interest rate for this borrower at the moment is 4.51%. If this rate rose by 0.25%, their monthly loan repayments would increase by $50.

$500k home loan over 25 years with an 80% LVR - If the average rate for this borrower increased by 0.25% to 4.62%, their monthly repayments would shoot up by an extra $71.

$700k home loan over 30 years with a 90% LVR - An increase from the current average interest rate of 4.49% to 4.74% would mean an extra $104 in interest each month for this borrower.

$900k home loan over 30 years, with an 80% LVR - If this borrower's rate went up 0.25%, from the current average of 4.37% to 4.62%, they’d wind up shelling out an extra $134 each and every month.

“The RBA are eventually going to move towards the neutral cash rate of 3.50%. So if you have a home loan, it’s a good idea to start thinking about your budget now, so you’re prepared for extra costs,” said Marshall.

Mozo’s top budgeting tips for home loan borrowers

If you’re looking at an extra $50 - $100 on your monthly repayments when the Reserve Bank eventually raise rates, here are some strategies to help ease the squeeze on your budget.

• Eat in. Embracing home-cooked dinner parties at a friends place instead of a restaurant outing can save you a tonne of cash. In fact, Mozo’s recent Cost of Lifestyle Report found that restaurant dinners racked up a $11.7 billion bill for Aussies last year. Think of all those potential savings!
• Have a garage sale. Or the modern day equivalent - putting your unwanted stuff up for sale on eBay. If you’ve got a garage full of old sports gear and a cupboard full of clothes you don’t wear, chances are you can make money from selling them second-hand, and free up some space as an added bonus!
  
• Switch to a better value mortgage. Another way to counteract a home loan rate hike is to consider refinancing to a better deal. There are heaps of great rates on the market at the moment, so head over and compare home loans to see if you’re on the best possible deal for you.