The Reserve Bank of Australia (RBA) has hiked the cash rate by 0.50 per cent - the second time the central bank has hiked in two months.
The official interest rate is now at 0.85 per cent.
RBA governor Philip Lowe said the rising cost of living is the main reason behind the hike.
“Inflation in Australia has increased significantly,” he said.
“Global factors, including COVID-related disruptions to supply chains and the war in Ukraine, account for much of this increase in inflation.”
However, Lowe said the Australian economy is still “in good shape” and while households are generally in a good position the RBA is watching to see how Aussies deal with the current changes.
“One source of uncertainty about the economic outlook is how household spending evolves, given the increasing pressure on Australian households' budgets from higher inflation,” he said.
What does this mean for mortgage holders?
Mortgage holders should prepare to pay extra on their home loans, with banks expected to pass on the hikes.
After today’s hike, someone with a $500,000 loan on the average variable rate with 25 years remaining can expect to pay $133 extra per month.
Someone with a loan of $600,000 can expect to pay an additional $159 a month.
With $750,000 remaining on the loan, repayments will increase by $199 a month.
Finally, with a loan size of $1 million, repayments will rise $265 a month.
What does this mean for property prices?
Property prices are starting to cool, and subsequent rate hikes will likely help to drive prices down further.
Higher interest rates along with tighter lending standards mean fewer Aussies looking to purchase a home and less competition in the market.
“Higher interest rate expectations have weighed on housing price growth across the country in 2022,” Proptrack chief economist Paul Ryan said.
“Housing price growth has slowed significantly, with annual price growth falling from 24 per cent six months ago to only 14 per cent in the year to May.”
Ryan said more interest rate increases were expected over the course of the year as inflation continued to climb.
“But just how high interest rates will be at the end of the year is a key source of uncertainty for the housing market,” he said.