RBA rate hikes impact Australian mortgage holders, renters and currency

Rate rises are felt fastest, and most sharply, by Australians with variable-rate mortgages because banks typically pass on RBA increases in full.

AMP chief economist Shane Oliver says the cash rate is the main tool steering borrowing costs and households should expect lenders to adjust quickly.

"As we've seen with the first three hikes this year, the banks will likely announce a 0.25 per cent increase in their mortgage rates on the same day," Dr Oliver says.

Ms Allen says households with a mortgage may lower spending or use savings to keep spending as a result of higher interest rates.

"This cash flow channel is one way monetary policy works to impact demand in the economy," she says.

Each 0.25 per cent rise in the cash rate adds roughly $91 per month to repayments on a $600,000 variable-rate loan with 25 years remaining. The four 2026 increases totalling 0.75 per cent have added approximately $360 per month for borrowers on a $600,000 loan.

That equates to around $4,320 extra per year.

Here's how much a September rate hike will cost borrowers, as well as the total monthly increase if rates go up for a fifth time in either November or December:

Loan sizeHike in SeptemberTotal increase for 4 hikesTotal increase for 5 hikes $600,000+$91/month+$364/month+$456/month $750,000+$114/month+$454/month+$570/month $1,000,000+$152/month+$606/month+$759/month

Source: Canstar

It is not just existing mortgage borrowers hit by the rate rises though.

For prospective buyers, Canstar estimates that the borrowing capacity of someone on an average full-time wage of $108,650 would be reduced by more than $47,000, while a couple both on average wages would see a reduction of nearly $95,000.

If you are on a fixed-rate home loan, you won't see any changes. Those rates are locked in.

But when the fixed term expires and rolls to a variable rate, the full impact of any rate cycle will apply at once.

For renters, the interest rate impact is more indirect.

Some landlords may try to offset the impact of rate rises on their cash flow by raising rents over time, although there are constraints on how often and how much rent can be increased each year in most states.

The RBA has also dismissed the idea that landlords pass their increased borrowing costs on to renters.

Speaking on 9Now's The Pay Off podcast, RBA chief economist Sarah Hunter said what was really driving rents came down to supply and demand.

"If you're an individual landlord, you own one property in one rental market, you might want to put the rent up when your interest rate goes up if you've got a mortgage," Dr Hunter said.

"But you're competing with all the other properties that are available … and so, it's demand and supply; it's the local market that will equilibrate rent.

"If rents are tracking up, it's usually because demand growth is stronger than supply growth."

Ms Allen and Dr Oliver agree with this logic.

Cotality's quarterly rental review found rents rose by 1.6 per cent nationally in the June quarter, driven by a severe lack of available stock across the country.

The national dwelling vacancy rate sat at 1.6 per cent, unchanged from March and remaining below the five-year average of 1.8 per cent.

"The main factor driving rents is the shortage of rental property," Dr Oliver says.

Higher interest rates tend to strengthen the Australian dollar (AUD).

And that's because it's more attractive for foreign investors to park their money in Australian interest-bearing assets (like savings accounts, term deposits, and government bonds) because they can get a higher rate of interest here.

This increases demand for the AUD, making the currency more valuable.

That generally means imported products can cost less in Australian-dollar terms and overseas travel becomes cheaper.

But Ms Allen says the Australian dollar's value depends on far more than the RBA's cash rate decisions.

"The Australian dollar is influenced by many things — global interest rates, commodity prices, China, investor sentiment and expectations about the Australian economy — so you can't say that a 25-basis-point rate hike will automatically result in a particular move in the dollar," she says.

Dr Oliver agrees, noting that with the US Federal Reserve also tightening monetary policy, any upward pressure on the Australian dollar may be offset.

"I suspect it probably just keeps the Aussie dollar around where it is," he says.