Ramona Gupta has been saving for her first home since she was 18 years old.
Now in her mid-30s, she recently purchased a two-bedroom apartment in Rockdale, about a 30-minute drive south of Sydney's CBD.
It's an exciting time for Ms Gupta, who moved in just days ago.
But like many mortgage holders across the country, she feels "nervous" about the Reserve Bank of Australia's (RBA) decision to lift the official cash rate — which influences how banks set their interest rates — to 0.35 per cent from a historic low of 0.1 per cent.
The official cash rate, which has not increased since November 2010, had been at that 0.1 per cent rate since November 2020.
But , the RBA's board decided on Tuesday to lift the rate by 0.25 percentage points.
Ramona Gupta, who recently purchased a home in Rockdale, NSW. Source: Supplied
She said she is in a fortunate position at the moment, with money in an offset account reducing the total figure of the variable component of her loan and in turn, the amount of interest she has to pay.
But the fixed rate is locked in for only two years, and she has concerns about what interest rates might look like when the time comes to refinance.
"We've had historically low interest rates since 2010, but I don't think we're going to see them that low again," Ms Gupta said.
Why did the RBA raise the cash rate, and what does it mean for mortgage holders?
RBA governor Philip Lowe said the board judged that now is the right time to begin withdrawing some of the extraordinary monetary support that was put in place to help the Australian economy during the COVID-19 pandemic.
He also said there will be further interest rate rises.
"The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected," a statement from Mr Lowe released on Tuesday read.
"There is also evidence that wages growth is picking up. Given this, and the very low level of interest rates, it is appropriate to start the process of normalising monetary conditions."
Figures released last week showed annual inflation rising 5.1 per cent and underlying inflation increasing to 3.7 per cent — well above the RBA's two to three per cent target.
"This rise in inflation largely reflects global factors," Mr Lowe said.
"But domestic capacity constraints are increasingly playing a role and inflation pressures have broadened, with firms more prepared to pass through cost increases to consumer prices."
A further rise in inflation is expected in the near term.
The RBA's central forecast for 2022 is for headline inflation of around six per cent and underlying inflation of around 4.75 per cent.
By mid-2024, headline and underlying inflation are forecast to have moderated to around three per cent.
"These forecasts are based on an assumption of further increases in interest rates," Dr Lowe said.
"The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time."
Banks expected to pass on full increase to customers
AMP Capital's chief economist, Shane Oliver, expects the banks will pass on the 0.25 percentage point increase in full to their customers.
Mr Oliver said when inflation was low during the height of the COVID-19 pandemic, the RBA cut interest rates in a bid to spur demand in the economy.
"Now we face the opposite problem," he said.
"We've got constraints on the supply of goods as a result of the pandemic, the floods [in Australia], and the war in Ukraine.
"But demand has been very strong... so the Reserve Bank can't do much about the lack of supply, but it can slow down the pace of demand, and one of the best ways to do that is to raise interest rates."
Mr Oliver expects the RBA may raise rates two meetings in a row and then monitor the impact.
"I don't think we're going to see ultra-aggressive moves unless inflation goes a lot higher from here," he said.
He said interest rate hikes will likely continue until the middle of 2023.
"We'll probably hit 1.5 per cent by the end of this year, and about 2 per cent by the middle of next year," he said.
"I suspect that once we get to about 2 per cent they will have seen the slowdown that they want, and they'll get more confident that inflation is coming under control."
What does it mean for first-home buyers?
The impact of the rate rise on first-home buyers will be mixed, according to director of economic research at property data company PropTrack, Cameron Kusher.
Mr Kusher said house prices would likely start to fall as interest rates go up.
"But on the other hand what also happens is, as interest rates go up, you're assessed on your ability to repay a mortgage rate, which is much higher than the assessment rate at the moment," Mr Kusher said.
Banks currently conduct a 3 per cent 'stress test' when assessing a prospective property buyer, which means they will look at a purchaser's capacity to repay a loan if interest rates were to rise by 3 per cent.
"And ultimately, that would mean that you could potentially borrow less than you would have been able to before interest rates started to climb," he said.
What will it mean for renters?
Mr Oliver said low vacancy rates would remain the key driver for rental price increases, rather than interest rate hikes.
"Some landlords may pass [some of the additional costs associated with interest rate rises] on, but others may conclude that there's no need... because of the benefits of negative gearing," he said.
"So it could but a little bit of upward pressure on rents... but I don't think it's going to be significant."
Mr Kusher said as interest rates increased, so too would savings account rates.
"You'll start to get a little bit of a higher interest rate on savings that you may be putting towards a mortgage," he said.
"So in that context, it's positive, but it's likely that the cost of renting is going to increase."
The Coalition has pledged to , while Labor recently unveiled a to help about 10,000 low-to middle-income earners a year if it wins government.
Mr Kusher said these programs and rising rental costs may "give people more of an impetus to move out of the rental market and into their first home".
"I think both sides of politics are looking to find ways to encourage people into homeownership," he said. "But do your due diligence if you're going to take up one of those schemes to try and buy your first home."
How should mortgage holders and prospective buyers respond?
Marickville Mortgage Choice broker Chantelle Rangel said mortgage holders should consider trying to negotiate with their lender for better rates, or look at refinancing.
Borrowers could also consider splitting their home loan, with a variable component allowing for additional repayments, and a fixed portion to protect against future rate increases, Ms Rangel said.
Ms Rangel said that as interest rates continued to climb, banks would likely re-strategise to attract new customers.
She said they may roll out cash incentives for first-home buyers and offer lenders mortgage insurance waivers to potential buyers with a smaller deposit.
Banks may also offer lower introductory rates for first-home buyers, and cash bonuses for those who refinance, she said.
She said first-home buyers and those looking to take out another mortgage should ensure they compare interest rates among lenders.
"Conduct your own stress test on your potential loan with inflated interest rates," she said.
"[And] review your own contingency plans to ensure you are not overextending yourself and you have options to reduce existing expenses if you need to."
With additional reporting by AAP.
