If the Cash Rate Hits 5%: Repayments by Loan Size

Key takeaways

• Roughly $42 per month per $100,000 borrowed, for a 0.65 point move.
• Pass-through is not guaranteed to be full - lenders manage margin.
• Assessment rates would rise too, cutting borrowing capacity further.
• This is a scenario, not a forecast.

What would repayments look like?

Illustrative: 30-year term, principal and interest, variable rate moving from 6.00% to 6.65%.

Substitute your own starting rate and remaining term. The relationship is close to linear in loan size, so the per-$100,000 figure travels well.

Would lenders pass it on in full?

Historically, variable home loan rates have moved close to in line with cash rate increases, though not always immediately or precisely. Lenders manage net interest margin across lending and deposits, and the decision about how much to pass through - and to which products - is a commercial one.

What is more reliably true is the asymmetry: increases tend to be passed to borrowers quickly, while deposit rate increases are slower and more selective. So a household is likely to feel a rise in full and a fall only partially.

The second effect is on borrowing capacity. Because lenders assess at a rate at least 3.0 percentage points above the product rate, an assessment rate near 9.25-9.5% today would move towards 9.65% - and maximum borrowing falls accordingly, removing buyers from the market.

What should you do now?

The useful actions are the same whether or not the scenario happens, which is what makes them worth doing.

1. Run the number for your own loan. If an extra $250 or $400 a month would be a problem, that is worth knowing before it arrives.
2. Build the offset balance. Every dollar in offset reduces the interest charged and creates a buffer you can access.
3. Request a reprice. Closing a 0.30 point gap to new-customer pricing offsets a meaningful share of a 0.65 point rise.
4. Check your fixed expiry date. Rolling off a fixed rate means taking the accumulated change at once, and that date should be diarised well in advance.
5. If it is already tight, contact your lender early. Hardship options are far broader before arrears than after.

To be explicit: this is a scenario for planning, not a prediction. Nobody knows the path of the cash rate, including the people who set it.

Frequently asked questions

How much would repayments rise if rates went up 0.65%?

About $42 per month for every $100,000 borrowed, on a 30-year principal and interest loan at rates around 6%. On $600,000 that is roughly $254 a month.

Do banks always pass on the full cash rate rise?

Variable home loan rates have historically moved broadly in line with cash rate increases, though timing and the exact amount are commercial decisions. Increases tend to be passed on faster and more fully than decreases.

How would this affect how much I can borrow?

Borrowing capacity would fall, because lenders assess at a rate at least 3.0 percentage points above the product rate. A higher product rate lifts the assessment rate, reducing the maximum loan your income supports.

Should I fix my rate if I think this will happen?

Fixed rates already price in market expectations, so you are not getting an advantage from a view the market shares. Decide based on how much repayment variability your budget can absorb rather than on a rate forecast.

Related reading

• What a 50bp Hike Does to a $750,000 Loan
• How a 0.25% Rate Rise Changes Repayments, by Loan Size
• Stress-Testing Your Own Budget at +3%

Sources

• Statistical tables - lending rates — Reserve Bank of Australia
• Prudential Practice Guide APG 223 Residential Mortgage Lending — APRA