Interest Rates in Australia – What’s Happening in 2023?

Interest rate update – Current and Forecast

On the first Tuesday of every month, the RBA announces any movements in Australia’s cash rate. On the 7^th February 2023, the RBA publicised the first cash rate hike of 2023 being 0.25 basis points, bringing the cash rate to 3.35%. This is the 9^th consecutive month of the RBA raising the cash rate, taking the rate target to its highest level since September 2012.

So what is the likely outcome of the RBA’s cash rate movement for 2023? While no one has a crystal ball, RBA’s Governor, Philip Lowe, stated that “further increases in interest rates will be needed over the months ahead” to assist with inflation pressures. Most major economists are expecting the RBA to continue to raise the cash rate for at least the next few months by 0.25 basis points each time. The RBA will want to see Australia’s inflation rate come down before they stop raising the cash rate.

What does this mean for you?

1. If you have any form of debt

The banks use the cash rate to determine interest rates for their own products. Immediately after the RBA’s announcement, ANZ and NAB responded to the hike by increasing their rates by the same 0.25% increase. It is common for all other Australian banks to follow suit. Therefore, for any borrower on a variable loan – they will experience an increase in their loan repayments accordingly. Borrowers that elect to make principal & interest repayments will see less of their principal come off their loan, whilst the interest component increases. Borrowers on a fixed loan will need to take into account the impact to their cash flow position once their fixed term is up.

2. If you’re looking to enter the property market
   

What we’ve seen so far in 2023 in relation to the property market is that it has definitely slowed down in comparison to prior periods. Below are some key factors we’ve noted in the property market:

• There are fewer properties hitting the market and those that are on the market are not moving as quickly as previous years.
• We’ve also seen property prices amongst the major cities take a hit, but we’re yet to see fire sales on properties.
• The increase in interest rates has severely dampened the borrowing capacity of prospective buyers. Experts say that the rate hike will wipe out an estimated 25% of buyers borrowing capacity, which could reduce the number of buyers in the market.
• Home owners taking a hit on higher loan repayments are holding off selling their properties. Nationwide listings have slumped by 13.8% compared to a year ago. “Property owners believe it is a bad time to sell and are holding back on listing their properties, waiting for a market recovery,” says Louis Christopher – respected property analyst.
• Interest rate rises result in a decrease of a household’s disposable income. Those families with investment properties may be looking to sell their investment properties as repayments become too costly and simply cannot be afforded. This will be critical for investors currently on fixed loans whose term expires soon.

As you can see, there is a mixed bag of influences on the property market right now. We’re not seeing a lot of pain yet, however this could change as rates continue to rise in 2023.

Reserve Bank definitions

Monetary Policy

The monetary policy is managed by the RBA and involves setting the cash rate, which influences other economic factors such as interest rates, borrowing and lending behaviour, activity in the economy and ultimately the rate of inflation. When determining the monetary policy, the bank has a duty to contribute to the stability of the current employment levels, economic prosperity and welfare of the Australian people.

Cash rate

The cash rate is determined by the RBA and is reviewed monthly. Credit providers can choose to increase or decrease their interest rates in line with the cash rate.

Interest Rate definitions – Fixed vs. Variable

Fixed

A fixed interest rate on your loan means that you can lock in a rate for a set period, which is generally one to five years.

Advantages:

1. You are safe from interest rate rises during the fixed period
2. You can manage your money effectively as the repayment amount doesn’t change if rates increase.

Disadvantages:

1. If interest rates drop, you will not receive the benefit of this reduction
2. You may be limited to make additional repayments to your loan and can incur fees and penalties if extra repayments are made
3. If you make adjustments to your loan or sell your property within the mortgage term, you can incur expensive break fees.

Variable

A variable interest rate is an interest rate on a loan or security that fluctuates over time.

Advantages:

1. Under a variable rate loan, you can make extra repayments towards your mortgage without incurring hefty fees. The size of your loan can reduce drastically, subsequently reducing the amount of interest incurred on the loan
2. If interest rates go down, so will the amount of interest charged on your loan. Your repayments will reduce, which has a really positive outcome for the borrower.

Disadvantages:

1. Financial uncertainty. Because interest rates are heavily influenced by the cash rate, if the cash rate increases – so does the amount of interest charged on your loan
2. Rising rates can increase the size of monthly repayments which can impact the cash flow of the borrower.

Now what?

Well now you are armed with the most important definitions and key concepts that relate to interest rates as well as a general overview on our 2023 predictions.

If you are a home owner with any form of loan, whether it be for your personal residence or investment property – keep track of your interest rates. Understanding the current market and expectations can assist you in budgeting for future increases and how the potential rise in repayments can affect your cash flow.

If the interest rates you are being charged don’t align with recent changes, you may be in a position to question your bank about why they aren’t following the RBA’s cash rate. Comparing rates across the market can paint a good picture of the average rate and if you fall within these ranges. If you are unsure about the rate you are being charged, or are nervous about your current or future financial situation – speak to your mortgage broker or financial advisor for advice.

On the other hand if you are about to take out a loan it's important to ensure you are taking on one that suits your situation. Again, speaking to a mortgage broker or financial adviser is a good way to do this.

Staying informed and updated is the best way to plan ahead and manage your individual situation. If you have any questions and would like to discuss your situation, our experienced team at BLG Business Advisers is here to help you out so please feel free to talk with us.

Our team are Wollongong Accountants who service right around Australia. There is no cost or commitment involved in an initial chat with us, which leaves you free to decide if we are the right fit for you.

Whatever you decide we wish you and your business every success!

*Please note that the above information is general advice only. We recommend you seek advice from a specialist relevant to your personal situation. This information is relevant at the time of publishing and is subject to change*