Borrowers 'set for rough ride'

As expected, the Reserve Bank of Australia (RBA) raised interest rates by 25 basis points to 6.50 per cent, the highest level since November 2006.

The increase will add a little about $50 a month to the cost of an average $250,000 standard variable rate mortgage.

And that will hit first-home buyers and low income and working families the hardest, mortgage companies and housing groups say.

The rate rise will make housing even less affordable and more difficult to manage household budgets, the head of strategy and retail marketing at lender Members Equity Bank, Sue Jamieson, said

"While families struggle to keep their heads above water, today's decision by the Reserve Bank will simply make it harder for most," she said.

"The Reserve Bank's argument, that levels of household debt in Australia was not a huge problem because assets had increased, did not account for significant pockets of Australia that have missed out on all of that wealth.

"Members Equity Bank is concerned that the interest rate policy is such a blunt instrument that particularly hurts low income earners and new home buyers, least able to afford an increase in mortgage payments.

"It also hits working families struggling to keep up with the cost of living, petrol and mortgage."

The Housing Industry Association (HIA) said people with mortgages and others trying to enter the housing market would do it tough from now on.

"Too many are being locked out of the market, which is having some disturbing consequences for the private rental sector which is already strained," HIA managing director Ron Silberberg said.

"The current housing situation is dire and shows all the symptoms of inadequate supply."

The Mortgage and Finance Association of Australia, Australia's peak mortgage industry body, said one in four borrowers will struggle with the rise, which is expected to be passed on by banks and other institutions.

But mortgage broker Mortgage Choice said some borrowers had been resting on their laurels when it came to managing their mortgage and could take steps to lessen the impact.

"This month's widely predicted rise should be the jump start many need to seriously reconsider their current mortgage situation, which should be done every year anyway," Mortgage Choice's national manager of corporate affairs Warren O'Rourke said.

"And for the large number of people who have secured their first mortgage in the last 12 months, it will be the first time they have had to budget extra dollars per month for their property repayments.

"This will take some adjustment."

Mr O'Rourke said borrowers should consider debt consolidation, fixing some or part of their loans or refinancing.

Non-bank lender Resi Mortgage agreed that many borrowers will need to look beyond the latest round of federal government tax cuts to offset today's rate rise.

"Until now, tax cuts have gone some way to providing relief for many borrowers, but this latest interest rate increase may take a lot of people by surprise and into new territory when it comes to funding it," Resi head of consumer advocacy Lisa Montgomery said.

Ms Montgomery said borrowers looking for additional ways to cover increased repayments should look carefully at their finances.

"If you are feeling pressure from this rise, completing a stocktake on your personal financial situation can often unearth opportunities to re-allocate your disposable income," she said.