How today's RBA rate hike affects your hip pocket - ABC News & Headlines – Australian Broadcasting Corporation

The RBA rate rise impacts more than just your home loan. (ABC News: Teresa Tan/Declan Bowring)

For the fifth time this year, the Reserve Bank of Australia (RBA) has raised the cash rate by 0.25 percentage points as it continues its efforts to curb inflation.

While the effects of RBA rate decisions are most obvious in mortgage repayments, their impact extends well beyond home loans.

Here's a look at how the latest increase is likely to affect households, whether they're paying off a mortgage, renting, or relying on savings.

Before looking at who wins and loses from a rate rise, it's worth understanding what the cash rate actually is.

Set by the RBA, the cash rate is Australia's official interest rate charged on unsecured overnight loans between banks.

Put simply, it's how much it costs banks to borrow from each other. When the RBA lifts the cash rate, it becomes more expensive for lenders to borrow from one another.

To offset those higher costs, banks often look at charging customers a higher interest rate to still make a profit because they are paying more to borrow the money in the first place.

On Tuesday, the RBA increased the cash rate to 4.85 per cent to slow down inflation in the economy. The last time the rate was above this level was 18 years ago in November 2008.

PRD chief economist Diaswati Mardiasmo says the central bank has lost its patience, given inflation is on an increasing pattern.

"The theory is, a higher cash rate translates into higher interest rates and mortgage repayments, which dampens household spending on other things like recreation and culture, transport, entertainment, and services," Dr Mardiasmo says.

"As demand/spending goes down, prices of the items also go down, which slows inflation overall."

But that doesn't always work when there are other things in play.

As an example, Dr Mardiasmo points to the war in the Middle East causing fuel prices to increase.

"So even if we don't go out to eat at restaurants as much due to paying for higher mortgage loans, we still have to pay for much more expensive fuel," she says.

Headline inflation rose to 4.3 per cent in the year to September, up from 4.0 per cent in August.

Trimmed mean inflation, the RBA's preferred measure of underlying inflation, rose to an annual rate of 3.6 per cent.

This means underlying inflation has sat above the RBA's 2 to 3 per cent target range for 14 consecutive months.

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 four 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.

Each 0.25 per cent rise in the cash rate adds roughly $92 per month to repayments on a $600,000 variable-rate loan with 25 years remaining. The five 2026 increases totalling 1 per cent have added approximately $456 per month for borrowers on a $600,000 loan.

That equates to around $5,472 extra per year.

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

For prospective buyers, Canstar estimates the borrowing capacity of someone on an average full-time wage of $108,650 would be reduced by more than $58,000, while a couple, both on average wages, would see a reduction of nearly $117,000.

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 increasing rent. Although, there are constraints in how often and how much rent can be increased by each year in most states.

But the notion that landlords pass their increased borrowing costs onto renters has been challenged by the RBA.

Speaking on 9Now's The Pay Off podcast, RBA chief economist Sarah Hunter said what was really driving rent 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."

Cotality's quarterly rental review found rents rose by 0.5 per cent nationally in the September quarter, driven by a severe lack of available stock across the country.

The national dwelling vacancy rate sat at 2.1 per cent, unchanged from March and remains well below the pre-COVID decade average of 3.3 per cent.

Dr Mardiasmo says higher interest rates can still influence rents indirectly by affecting the number of investors entering the market.

"If investors are discouraged from entering the market because of reduced borrowing power and higher loan repayments, there may be fewer rental properties available," Dr Mardiasmo said.

"When demand for rental housing remains strong but supply falls, competition among tenants increases and that can put upward pressure on rents."

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.

"Australians who are purchasing items overseas, are going on holidays, or have term deposits/savings overseas can benefit," Dr Mardiasmo says.

"For businesses who import goods, it also means that their import costs are now cheaper, which supports better profit."

But Commonwealth Bank head of Australian economics Belinda 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."

There is one silver lining: savings account and term deposit interest rates usually rise after an RBA hike, making it more attractive to park your money.

This is because, while the cash rate affects borrowing costs for banks, it also sets the rate of return for their own deposits. Cash rate hikes improve their returns, which may be passed on to consumers through higher savings interest rates.

Dr Oliver says while short-term deposit rates largely move in line with the cash rate, longer-term term deposit rates are also shaped by government bond yields and other borrowing costs.

With today's RBA increase and bond yields already rising, he says savers are likely to benefit from higher returns.

"The odds are, yes, we will see deposit rates continue to rise."

But as ABC business reporter Adelaide Miller reported, Australians with billions in savings could be missing out on the benefits of rising rates if they're in the wrong account or fail to meet bonus rate conditions.

Canstar found higher rates were often restricted to select products with strict requirements, with customers otherwise earning a base rate as low as 0.10 per cent.

Car loans and personal loans can be affected by increases in the cash rate.

But it all comes down to what type of loan you have.

Australians collectively borrowed about $4.7 billion in fixed-term personal loans for road vehicles in the three months to June 2026, according to the Australian Bureau of Statistics.

These loans would not be affected by the cash rate until the fixed-rate period ended.

For those on a variable rate however, Dr Oliver says banks may not necessarily hike rates by the full 0.25 per cent, but "the odds are they'll probably go up over time as well".

Dr Mardiasmo says it also depends on who you have a car loan with: bank, car dealer, or the manufacturer themselves, and how each of those are structured.

So the bottom line is check in with your finance provider.

But the four major banks have their theories.

At this moment in time, Westpac, NAB and Commonwealth Bank economists predict we may see cuts from August 2027.

ANZ is a little more pessimistic, predicting the first rate cut could be in November.

The RBA will deliver its last cash rate decision for the year on Tuesday, December 8.