Interest Rates Set to Rise: What It Means for Your Mortgage

Interest rates are expected to rise for the fourth time this year, with financial markets and economists predicting a 25-basis-point hike when the Reserve Bank meets on Tuesday.

A rate increase would take the cash rate target from 4.35 per cent to 4.6 per cent, the highest level since November 2011. But some analysts warn that this may not be the last rate hike before Christmas.

How does the Reserve Bank make its decision?

The Reserve Bank's Monetary Policy Board will start a two-day meeting on Monday to decide on the next move in interest rates. The board members will receive briefing papers from Reserve Bank staff to help them understand current economic conditions and the RBA's views on the outlook.

However, the board will not receive a full updated economic forecast from the RBA's economics team, as this is only done on a quarterly basis in the Statement on Monetary Policy. The next updated forecast will come in November.

What does it mean for your mortgage?

A 0.25 percentage point rate hike, if passed on in full by banks, would add $91 to the monthly repayments on a $600,000 loan. And another 0.25 hike in November would add $92 on top of that.

For someone on a $600,000 mortgage, a rate hike on Tuesday will see them paying nearly $4,400 a year in extra interest repayments on their loan.

Expert predictions

All 29 economists surveyed by Bloomberg predict a rate rise to 4.6 per cent on Tuesday, including all four of Australia's major banks. However, most expect the RBA to be done with hikes after Tuesday.

"But by the time it gets to the November meeting there is likely to be more evidence of a cooling economy, falling home prices, a softer jobs market and rising recession risks, so we don't think a second hike let alone a third will be necessary,"

said Shane Oliver, chief economist at AMP.

However, money markets are pricing in at least two more hikes and a better than 50 per cent chance of a third, which would take the cash rate above 5 per cent by the middle of next year.

Banks lift fixed mortgage rates

The banks are already following that market pricing and their own forecasts by lifting fixed mortgage rates. Canstar rate tracking shows 18 lenders have now increased at least one fixed term rate in September.

"Fixed rates are, in part, a bet on the future,"

said Sally Tindall, data insights director at Canstar.

"And what the data tells us is that banks big and small are preparing for the increasing possibility rates will rise and stay higher for longer."

Impact on borrowers

Australians are bracing for one, maybe two interest rate rises before the end of the year. For prospective buyers, Canstar estimates that the borrowing capacity of someone on an average full-time wage would be reduced by more than $47,000.