The RBA board on Tuesday decided to increase its cash rate target by 25 basis points to 0.35 per cent, in a bid to control inflation which, according to the most recent figures from the ABS, is rising at its fastest pace in 21 years.
The cash rate target serves as a benchmark for home loan interest rates, and whenever the RBA increases the cash rate, lenders tend to follow suit by increasing variable interest rates. That means borrowers could soon see their mortgage repayments rise.
So now that the cash rate has gone up and is predicted to continue rising over the coming months, what will this mean for home buyers and home owners with mortgages?
How will rising interest rates affect home buyers?
Buyers looking to enter the property market could see a reduction in their borrowing power as a result of the cash rate increase.
When banks approve home loan applications, they assess borrowers’ ability to repay their home loans at an interest rate several percentage points higher than the mortgage rate, known as the assessment rate.
With interest rates and mortgage repayments now rising, some potential borrowers may see a reduction in the maximum amount of money they could otherwise have borrowed, as lenders look to ensure that borrowers will be able to continue repaying their home loans, even at higher interest rates.
Buyers may experience different levels of reduction to their borrowing power, depending on their circumstances and the lender, says Gregory Boustead, home loan specialist at Domain Home Loans.
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