Home loan costs skyrocketing: will the RBA hike the cash rate in July?

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The Reserve Bank of Australia (RBA) has responded swiftly to soaring economic inflation, hiking the official cash rate 0.75% in the last two months alone. The movements brought interest rates back up to pre-pandemic levels and spelled much anxiety for home loan borrowers, many of whom were already feeling the squeeze from the rising cost of living

With the RBA’s July meeting looming next week, let’s investigate the likelihood of another rate rise and how banks will continue to react in the era of high interest.

What’s the likelihood of a July interest rate hike?

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Inflation continues to dog the Australian economy, with last quarter’s 5.1% spike in the Consumer Price Index rather forcing the RBA’s hand when it comes to raising the official cash rate. But since the Australian economy is also rather large and cumbersome, it’ll take awhile before things slow down. As such, economists almost universally agree we’ll see another rate hike in July – and it won’t be the last this year, either.

RELATED: Why understanding monetary policy can help you save money

Further rate hikes will continue to have knock-on effects on home loans and savings accounts, whose interest rates have already ballooned in the wake of the May/June decisions.

How high will interest rates go this time?

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Historically, the RBA takes a cautious approach whenever lifting the cash rate, typically only moving 25 basis points at a time. This “by the book” manoeuvre was what we saw in May as they began the process of normalising monetary conditions. However, June’s shock 50 bp rise eclipsed even the most hawkish predictions, so many economists will be bracing for a similarly aggressive jump in July.

“We’re in a situation where inflation has risen a lot more sharply than the RBA and others have forecast, and the cash rate is still very close to historic lows,” explains Nomura Australia senior economist Andrew Ticehurst. 

“The RBA has plenty of work to return the policy towards more normal levels, and I think you could make the case for bigger moves at the start of the cycle when you know you are a long way from where you need to be.”

RELATED: How to manage higher mortgage repayments

Where we ‘need to be’ is a terminal cash rate between 2% - 3% by 2023, as this range is estimated to have the biggest slowdown effect on inflation. To meet that target, Westpac predicts the RBA will hike the cash rate by 50 bp in both July and August before ending its tightening cycle at 2.6% in 2023, a view shared by Bank of America and Goldman Sachs. 

“Inflation is projected to be above the target band over the forecast horizon with unemployment being below its sustainable level,” commented the chief economist at the Centre of Independent Studies Peter Tulip, who used to work for the RBA. “They are the two things the central banks should be reacting to.”

Such a move from the RBA would put the official cash rate at 1.35% in July – 125 bp higher than it was just in April.

Loan details

Rate change

Repayment change if rates go up

Any chance of no rate hike, or a rate cut?

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It’s extremely unlikely – but not impossible – that the RBA would forego hiking the cash rate in July. After all, wages haven’t remotely kept pace with inflation, and any salary increases we’ve seen can mostly be attributed to reduced working hours in the wake of COVID-19 and extensive east coast flooding. If the RBA believes hiking the cash rate will stress family budgets way too much, they may leave things be. 

As for a rate cut, the RBA would only cut the rate if the economy were headed into a recession, which is a mild risk later this year.

How will banks respond to a July RBA cash rate hike?

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While banks pounced on the May rate hike quite eagerly, they were a little slower on the uptake for June. The Big Four (CommBank, ANZ, NAB, and Westpac) passed along the full 0.50% June rate hike within a few days of the RBA announcement, while other competitors followed suit over the next two weeks. 

At the time of writing, here’s how the 96 lenders tracked in Mozo’s database responded to the 0.50% June RBA hike.

  • 77% passed on the full rise to their home loan customers.
  • 6% passed on a partial or no hike. 
  • 15% have yet to make an announcement.
  • 1% passed on a rate hike higher than 0.50%.

The changes have shifted many home loans on the market back to pre-pandemic levels. Now, the average variable rate for owner-occupiers making principal and interest repayments sits at 3.61% p.a., up from 3.02% in April.

Customers hoping to avoid further variable rate hikes by fixing their home loans are out of luck, however, since many lenders have lifted fixed interest rates well beyond pre-pandemic levels. In fact, fixed rates haven’t been this high since 2015.

If the RBA moves the cash rate again in July, we can likely expect lenders, especially bigger banks, to pass along the costs in due course. By comparing what’s out there, customers hoping to buy-in or refinance will get a clearer idea of how different rates stack up, what’s competitive, and most importantly, what’s affordable.

What will another rate rise mean for home loan borrowers?

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If you’re feeling the mortgage stress, you’re definitely not alone. In a recent economic report, Westpac observed that Australian mortgages are remarkably sensitive to fluctuations in the cash rate because around 60% are on a floating (i.e. variable) rate. Borrowers may find themselves impacted in multiple ways by rate hikes, including via:

Up to 90% of mortgage borrowers are likely to be affected by one or more of these impacts over the next year and a half. 

If there’s a silver lining it’s that higher interest rates tend to push down property prices in the long run, so first home buyers may find themselves standing a better chance at auction – or even able to negotiate a price privately. However, for those feeling the squeeze, now’s an excellent time to take stock of your mortgage repayments and, if you don’t like what you find, look for other options.

Some strategies you can use to reduce mortgage stress include:

  • Refinancing. Many lenders, especially online lenders, have been keeping their interest rates extremely competitive in the era of rate hikes. Some even offer cashback if you refinance with them, so it’s worth comparing your current deal with others out there – and save some serious money doing it. (Here are some red flags to look out for in your lender).
  • Getting an offset account. An offset account is a bank account attached to your mortgage that ‘offsets’ (i.e. reduces) the amount of interest you repay. For example, if you have $200,000 left on your home loan and $50,000 in an offset account, you’ll only have to pay interest on $150,000. Just keep in mind that offset accounts are more common with variable rate mortgages – not so much with fixed rate options.
  • Paying down as much of your principal as you can. Any amount of principal you pay off now will save you interest later, so if you’ve come into some extra cash (maybe a nice tax refund?), consider putting it toward your mortgage repayments. Just make sure your lender allows you to do this at no extra cost: bonus points if there’s a redraw facility in case you need the cash for an emergency later.

Stay on top of rate movements with Mozo’s new interest rate tracker. You can also see how rate changes affect your mortgage repayments with our rate change calculator.

Home loan comparisons on Mozo

Mozo may receive payment if you click the products below. We don’t compare the entire market, but you can search our database of 473 home loans.
Last updated 21 June 2024 Important disclosures and comparison rate warning*
  • Unloan Variable

    • Owner Occupier
    • LVR <80%
    Interest rate
    5.99 % p.a.
    Variable
    Comparison rate
    5.90 % p.a.
    Initial monthly repayment
    $2,995
    Go to site

    Built by CommBank, the Unloan is the first home loan with an increasing discount (conditions apply) for borrowers. No application or banking fees. No monthly account keeping or early exit fees. Apply online in minutes.

  • Basic Home Loan

    • Owner Occupier
    • LVR<60%
    • Principal & Interest
    Interest rate
    6.14 % p.a.
    Variable
    Comparison rate
    6.16 % p.a.
    Initial monthly repayment
    $3,043
    Go to site

    Enjoy a low rate home loan with $0 application fee and $0 ongoing fees. Flexibility to split your loan and set different repayment types. Fee free redraw from your loan using online banking. Flexible ways to repay. 40% Deposit required.

  • Offset Home Loan

    • Owner Occupier
    • LVR<60%
    • Principal & Interest
    Interest rate
    6.14 % p.a.
    Variable
    Comparison rate
    6.39 % p.a.
    Initial monthly repayment
    $3,043
    Go to site

    Ability to open up to 10 offset accounts per loan account. Fast online application. Linked Debit Mastercard® with fee-free access at ATMs across Australia. Package a credit card with your home loan and the annual card fee will be waived (T&Cs apply). 40% deposit required.

  • Unloan Variable

    • Owner Occupier
    • LVR <80%
    Interest rate
    5.99 % p.a.
    Variable
    Comparison rate
    5.90 % p.a.
    Initial monthly repayment
    $2,995
    Go to site

    Built by CommBank, the Unloan is the first home loan with an increasing discount (conditions apply) for borrowers. No application or banking fees. No monthly account keeping or early exit fees. Apply online in minutes.

  • Discount Variable Home Loan

    • Owner Occupier
    • LVR<70%
    Interest rate
    5.99 % p.a.
    Variable
    Comparison rate
    6.01 % p.a.
    Initial monthly repayment
    $2,995
    Go to site

    A low rate home loan for owner-occupiers packed with great features including unlimited extra repayments, free online redraw, no application or monthly admin fees. Rate will vary depending on LVR. Winner of a Mozo Experts Choice 2024 Low Cost Home Loan Award^

  • Variable Home Loan 90

    • Principal and Interest
    • LVR <90%
    Interest rate
    6.04 % p.a.
    Variable
    Comparison rate
    6.06 % p.a.
    Initial monthly repayment
    $3,011
    Go to site

    Affordable home loan rate for buyers or refinancers. No monthly or ongoing fees. Option to add an offset for 0.10%. Access to savings with unlimited redraws available. Minimum 10% deposit required.

  • Fixed Rate Loan

    • Owner Occupier
    • Principal & Interest
    • LVR <80%
    Interest rate
    6.09 % p.a.
    Fixed 3 years
    Comparison rate
    6.15 % p.a.
    Initial monthly repayment
    $3,027

    Additional repayments of up to $10K per fixed year. Interest rate discounts available. Waiver of $499 application fee when combined with an Orange Advantage Home Loan.

  • The Better Home Loan Special Offer

    • Owner Occupier
    • Principal & Interest
    • LVR<80%
    Interest rate
    6.14 % p.a.
    Variable
    Comparison rate
    6.14 % p.a.
    Initial monthly repayment
    $3,043
    Go to site

    Enjoy a variable rate home loan with a bunch of features from Police Credit Union. Make extra repayments at any time without penalty. No monthly, annual or upfront fees. Free online redraw. Minimum 20% deposit. Qualifying criteria applies. Minimum loan amount is 200K. For new customers only. Mozo Experts Choice Home Lender Credit Union of the Year 2023.

  • Basic Home Loan

    • Owner Occupier
    • LVR<60%
    • Principal & Interest
    Interest rate
    6.14 % p.a.
    Variable
    Comparison rate
    6.16 % p.a.
    Initial monthly repayment
    $3,043
    Go to site

    Enjoy a low rate home loan with $0 application fee and $0 ongoing fees. Flexibility to split your loan and set different repayment types. Fee free redraw from your loan using online banking. Flexible ways to repay. 40% Deposit required.

  • Mortgage Simplifier

    • LVR<80%
    • Owner Occupier
    • Principal & Interest
    Interest rate
    6.14 % p.a.
    Variable
    Comparison rate
    6.17 % p.a.
    Initial monthly repayment
    $3,043

    Get a competitive variable rate with ING’s Mortgage Simplifier. Free extra repayments, no monthly or annual fees. Freedom to make free extra repayments or redraws.

  • Offset Home Loan

    • Owner Occupier
    • LVR<60%
    • Principal & Interest
    Interest rate
    6.14 % p.a.
    Variable
    Comparison rate
    6.39 % p.a.
    Initial monthly repayment
    $3,043
    Go to site

    Ability to open up to 10 offset accounts per loan account. Fast online application. Linked Debit Mastercard® with fee-free access at ATMs across Australia. Package a credit card with your home loan and the annual card fee will be waived (T&Cs apply). 40% deposit required.

  • Basic Home Loan

    • Fixed
    • Owner Occupier
    • Principal & Interest
    • LVR<70%
    Interest rate
    6.25 % p.a.
    Fixed 3 years
    Comparison rate
    6.20 % p.a.
    Initial monthly repayment
    $3,079
    Go to site

    No upfront or ongoing fees. Free extra repayments and redraw facility. Option to earn Qantas points. Min 30% deposit required. Borrow up to $750,000.

  • Fixed Rate

    • Owner Occupier
    • Principal & Interest
    • <80% LVR
    Interest rate
    6.59 % p.a.
    Fixed 3 years
    Comparison rate
    7.06 % p.a.
    Initial monthly repayment
    $3,190

    Enjoy up to $3000 cashback for eligible first home buyers and $2000 cashback for refinancers on eligible home loans with the ANZ Fixed Rate Home Loan. Get the security of repayment certainty with a competitive locked in rate. No ongoing fees to pay. Offset account on 1-year fixed loans ($10/month fee applies). Interest-only payments allowed.

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* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.

** Initial monthly repayment figures are estimates only, based on the advertised rate. You can change the loan amount and term in the input boxes at the top of this table. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.

^See information about the Mozo Experts Choice Home Loan Awards

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