With the cash rate now at 4.60 per cent, Governor Michele Bullock has acknowledged that the share of income Australians spend on mortgage payments will rise beyond the level reached while rates sat at 4.35 per cent.

From early May until the end of September, the cash rate target sat at 4.35 per cent. That setting became a reference point for borrowers and for the Reserve Bank alike. On 29 September, the Monetary Policy Board moved past it, lifting the target by 25 basis points to 4.60 per cent.

At the media conference that followed, Governor Michele Bullock addressed the burden on mortgage holders, and she was candid. Mortgage payments, she said, were "back up sort of around 10 per cent of" disposable income, comparing that with "when we had interest rates at 4.35 per cent, so they'll go up a bit further."

It was an approximation rather than a precise statistic, and Bullock framed it that way. But the message was clear: the September increase means the repayment burden will climb beyond where it stood in the 4.35 per cent era.

What the 4.35 per cent era looked like

The cash rate reached 4.35 per cent on 5 May, after rises on 3 February and 17 March. The Board then held it there at its August meeting, a unanimous decision. The minutes of that meeting show members weighed a 25 basis point increase against leaving the rate unchanged "for the time being".

During that period, the RBA was already describing repayments as high. On 13 August, Assistant Governor (Financial Markets) Christopher Kent said: "Scheduled mortgage payments have risen and are now close to their 2024 peak as a share of household disposable income." He also said "Lending and deposit rates have increased in line with the cash rate," indicating that the first three rises of the year had been passed through to borrowers and savers.

Kent described monetary policy at that point as "somewhat restrictive", with the cash rate "around the top of the range of central estimates of the neutral rate." On the Board's own assessment, then, policy was already restraining the economy to some degree before the September rise.

Bullock's comments suggest that the September increase pushes repayments beyond the point Kent described. The Board's own October Financial Stability Review, released two days after the decision, noted that "Scheduled mortgage payments have been the largest claim on household income".

One more step, illustrated

What does "a bit further" look like for an individual loan? The following is a hypothetical illustration only. It is not RBA data, and actual rates and outcomes vary by lender and borrower.

Take a $400,000 variable principal-and-interest loan over 30 years with monthly repayments. Assume the lender passed on each 25 basis point move in full, from a hypothetical rate of 5.60 per cent before February:

  • At 6.35 per cent, matching the cash rate's 4.35 per cent period, the monthly repayment would be $2,488.94.
  • At 6.60 per cent, after the September rise is passed on, it would be $2,554.64.

That is a difference of $65.70 a month, or roughly $790 a year. Across all four of this year's increases, the same illustration shows repayments rising from $2,296.32 to $2,554.64, an increase of about $258.32 a month, or roughly $3,100 a year.

The step from 4.35 to 4.60 per cent is, in this example, the largest of the four in dollar terms, because each rise applies to a loan already carrying a higher rate. The differences between steps are small, but they illustrate how incremental moves add up.

Who feels it, and who is cushioned

Not every borrower experiences "a bit further" the same way. Bullock noted that "a lot of people have a mortgage, and then they have an offset account, which sits in the background." According to the October Financial Stability Review, the median borrower is able to cover over a year of scheduled mortgage payments from offset and redraw buffers.

For others the margin is thinner. The review found that the share of variable-rate owner-occupier borrowers whose income falls short of essential spending and loan payments "remains relatively low at around 2 per cent", and it pointed to some pockets of stress. Bullock acknowledged the strain directly: "I know they don't understand why we have to do this and it hurts them."

Why the Board accepted the extra pain

The Board's rationale was inflation. Headline CPI inflation was 3.9 per cent over the year to the June quarter, and the monthly CPI indicator showed an annual rate of 4.0 per cent for August. Underlying inflation, measured by the trimmed mean, was 3.6 per cent in the June quarter, and Bullock described it as "about 3.5 per cent" at the press conference. The target is 2–3 per cent, with a midpoint of 2.5 per cent.

The September statement said some of the upside risks flagged in August were materialising, including higher global energy prices, AI-related demand lifting technology prices, capacity pressures and firms raising or planning to raise prices. "Higher interest rates are needed to ensure inflation returns to target," Bullock said.

The Board did not ignore the signs of cooling. Its statement noted that output growth had slowed, consumer spending was easing gradually, housing prices had fallen in most capital cities and new housing loans had declined noticeably. Even so, it judged that "a further tightening of financial conditions" was warranted to return inflation to target within a reasonable period, and said it was focused on preventing high inflation from becoming embedded.

She also stressed the time it takes for rate rises to work: "it can take 12, perhaps even 18 months". That means the full effect of moving beyond 4.35 per cent is still some way off.

The bottom line

Bullock's "go up a bit further" is a plain acknowledgement that the September rate rise lifts household repayments beyond the level reached in the 4.35 per cent era, when they were already close to their 2024 peak as a share of income. The RBA's data suggest most borrowers have buffers to draw on, but a small group is already under pressure.

Whether repayments rise further still depends on decisions not yet made. Bullock said the Board "will increase interest rates again if that's what's needed to get inflation down", but she also said: "I'm not going to give you forward guidance." The next decision is due at 2.30 pm on 3 November.