Interest rates have been historically low over the past two years. But now that the Reserve Bank of Australia (RBA) has increased the cash rate, and with many more cash rate hikes expected to come, interest rates are likely going to continue rising.
If you have a home loan, preparing for rising interest rates is essential, particularly if you currently have a variable home loan. Similarly, if you have a fixed rate home loan that is due to expire shortly, you should be prepared for potentially higher monthly repayments.
Let’s discuss what’s happening to interest rates right now, when they will rise, and how this may impact you.
Some people may believe interest rates only rise when the cash rate rises, but this is not necessarily the case. Fixed interest rates have been rising for some time now after hitting historic lows of less than 2% p.a. during the pandemic. Fixed rates rising may have been in preparation for a cash rate hike, but is likely due to a range of reasons.
While fixed interest rates have been rising for months, we are now seeing variable interest rates rise too. When the cash rate increases, usually variable interest rates increase also. Each time the cash rate increases, you may find that variable interest rates are bumped up.
To give you an idea as to when variable rates may increase, Commonwealth Bank economists predicted cash rate hikes of 25 basis points in June, July, August, November of 2022 and February of 2023. However, these are just predictions, and there is no real way to know what will happen until the RBA meets each month and decides whether to hold or increase the cash rate.
Unfortunately, there is no way to answer this question. We can’t look into the future and know how high the cash rate will go and, consequently, how high interest rates will rise. However, RBA Governor Philip Lowe gave some guidance as to what the cash rate could reach over the coming months.
According to Dr Lowe, the cash rate profile is 1.5% to 1.75% by the end of this year, and 2.5% by the end of 2023. Even with this information in mind, there’s no way to know how interest rates will rise in line with these increases.
To boil it all down, the main impact of increasing interest rates is that you will need to pay more money for your loan or credit card repayments. For example, if your home loan interest rate goes from 2% p.a. to 2.5% p.a., you will need to account for this in your repayments.
Let’s look at a very basic example to get an idea of how a higher interest rate can affect your monthly repayments. Using our loans.com.au home loan repayment calculator, we’ve looked at two hypothetical examples: a $500,000 mortgage with a 2% interest rate, and a $500,000 mortgage with a 2.5% interest rate. Both examples are for a principal & interest (P&I) home loan with a 30-year loan term.
For the home loan with a 2% p.a. interest rate, your monthly repayments would be $1,848.10 and you would pay a total of $165,315 in interest.over the life of the loan. With a 2.5% p.a. interest rate, your monthly repayments would be $1,975.60 and you would pay $211,219 over the life of your loan.
So when your interest rate increases by 50 basis points, your monthly repayments increase by $127.50, using the example above. Over 30 years, this represents an extra $45,904.
You can use our home loan repayment calculator to see how different interest rates might affect your mortgage repayments.
If you have a home loan, it’s always a good idea to be prepared for interest rates rising. Let’s go over a few simple ways you can get yourself ready.
It can be a good idea to review your current budget. Look at your income and expenses and see whether you have the capacity to put a bit more money towards your home loan. You may want to consider cutting down on non-essentials. For example, if you currently pay for every streaming service known to man, it might be worth cutting down to one or two.
It may also be helpful to review your emergency fund. It can always be helpful to have some money stowed away in case of an emergency.
If you’re worried about interest rates rising, you could consider making a few extra repayments now. This way, you’ll chip away at more of your principal amount, which means you’ll be charged less interest. You’re charged interest based on how much you have left to repay, known as the principal amount. So by having a lower principal, you’ll find that your repayments are lower.
Before making extra repayments, make sure you check with your lender about any fees, particularly if you’re in a fixed term home loan.
If you have a variable home loan, you may have an offset feature. By depositing money into your offset account, you can save on interest charges. This is because money sitting in this is ‘offset’ against the balance of your loan, and won’t incur any interest charges. This can help you pay off your loan quicker and avoid extra interest charges. To help calculate how many years you could take off your home loan, and how much you could save in interest, be sure to check out our offset calculator.
Variable rates rising doesn’t just mean your home loan repayments may rise; savings account interest rates should rise too. Consider putting some money away in a high interest savings account. This way, you can make some extra cash and benefit from interest rate rises.
Alternatively, you could look at term deposit interest rates. However, you can’t touch this money until the term deposit matures or you won’t reap the interest payment.
Paying down/off your other debts may help make your home loan more manageable. Your home loan is likely to be the biggest of your debts. So doing what you can to chip away at any other smaller debts can help you focus on paying off your home.
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