No doubt you’ve heard about Tuesday’s cash rate increase by the Reserve Bank of Australia (RBA). The official cash rate went up by 0.25% to 3.85%. This is the first increase in over two years and marks a shift in monetary policy after a period of rate cuts and stability.
Why did the RBA increase rates?
The RBA’s main job is to keep inflation in check, that is, to prevent prices for everyday goods and services from rising too quickly. The bank targets inflation of 2 – 3% over time, as this level is considered consistent with sustainable economic growth.
In recent months, however, inflation in Australia has picked up again and now sits above the RBA’s target range. According to the RBA, price rises were stronger than expected in the second half of last year, especially in areas such as services and retail. This “stronger-than-expected” inflation prompted the Board to decide that the cash rate was no longer at the right level to bring inflation back toward target within a reasonable timeframe.
Put simply: prices are rising too fast and the RBA wants to cool things down slightly. Higher interest rates make borrowing more expensive and make saving more attractive, which can help slow demand and ease inflationary pressures.
What does this mean if you have a mortgage?
Australia’s major lenders have already announced home loan rate increases of about 0.25%.
For someone with a variable-rate home loan, a 0.25% increase in rates will typically lead to higher monthly repayments. Based on the examples below, a borrower with a $750,000 mortgage could see monthly payments rise in the order of around $120, depending on the specific loan and lender.
This may not be financially stressful for everyone, but it will tighten budgets for many households, especially those already near their limits. If you’re unsure how this affects your situation, it’s a good time to review your budget and feel free to reach out to your financial adviser. We can also put you in touch with our mortgage broker partners, if you’d like to review your loan.
How much more will you pay?
These calculations are based on how much a typical borrower may need to pay back if their lender passes on the rate rise.
| Remaining repayment | Monthly repayments (assumed rate of 5.76%) | Monthly repayments with a 0.25% rate hike | Monthly extra repayment (to nearest $10) |
| $1,000,000 | $5840 | $6000 | $160 |
| $750,000 | $4380 | $4500 | $120 |
| $500,000 | $2920 | $3000 | $80 |
| $250,000 | $1460 | $1500 | $40 |
Source: Mortgage Choice (figures assume a starting rate of 5.76% and are rounded to the nearest $10).
What if you’re retired and have savings?
If you hold significant savings in cash, term deposits or other interest-bearing accounts, a rate rise can be a positive development. As the official cash rate climbs, banks often (though not immediately) increase the interest rates paid on savings accounts and term deposits.
However, the response from banks can be uneven. In some cases, mortgage rates were increased quickly, while some savings rates have not yet fully adjusted.
Will the RBA increase rates again this year?
The RBA hasn’t ruled out further increases. Economists and market forecasts suggest there could be additional rate rises later in 2026 if inflation remains elevated. The bank itself indicated that future decisions will depend on incoming economic data, particularly inflation and demand conditions.
In other words, this may be the start of a new rate-higher cycle, not a one-off move.
As always, your financial adviser is here to help if you have any questions about interest rate changes and how this could impact your plans.