Rising Interest & Home Loan Rates
Back in May, the Reserve Bank of Australia (RBA) increased the cash rate to 0.35%, and it soared again to 0.85% in June. Then, in July, the RBA raised it by 50 basis points, making it 1.35%. In its latest October board meeting, the RBA boosted the cash rate by 35 basis points to 2.60%.
According to Westpac economic experts, the RBA might increase the cash rate by 25 basis points each month until February 2023, leaving it at 3.35%. Commonwealth bank is more optimistic, foreseeing only one more 25 basis point hike in November before the rate comes to a halt.
While it used to increase the cash rate with increments of 0.25%, the RBA is increasing it significantly to compensate for the bounce back in economic recovery and contain the inflation following the pandemic in Australia.
These interest rate increases may raise mortgage repayments for homeowners who have taken home loans lately or previously. After all, the cash rate is a benchmark for home loan interest rates. In other words, lenders tend to use it to adjust their variable interest rates, making the home loan rate a few percentage points higher than the cash rate.
How Much More Will My Mortgage Be?
With the cash rate hikes, most lenders have increased their variable rates. In fact, they’ve passed on the cash rate rise fully. So, homeowners can expect an increase in their mortgage repayments, especially if they’ve recently taken on a home loan and are yet to repay the bulk of it.
For example, if you’ve taken on a $500,000 home loan with a 25-year loan period, the existing average owner-occupier variable rate might have been 2.86% in April. That means you’ll be paying $687 more. Let’s look at RateCity’s table to get a better idea of the increase in the monthly repayment:
|Month||Mortgage Repayment||Increase||Increase (%)|
Now, if you’re asking: “how much more will my mortgage be? And how much will my repayments go up?”, you can use this rate checker. Just add your loan amount, loan term, current interest rate, and home loan rate increase to find out.
Unfortunately, homeowners on a fixed interest rate aren’t entirely safe either. They’ll face the ramifications of rate hikes if their fixed mortgage loans are due to expire during this high.
But aside from home loans, have other loans been affected? Although lenders don’t have to respond to the cash rate or adjust their variable interest rates according to its movements, they often do.
Indeed, not long after the interest hikes were announced, banks and lenders increased their variable interest rates, which means higher monthly repayments for borrowers.
Fixed vs. Variable Rate Home Loan
Although we’ve briefly touched on this, let’s cover each loan type and the difference between them. This way, we can determine how and if the cash rate change will affect them.
On the one hand, if you’ve taken a fixed-rate loan, your lender will have settled with you on a fixed interest rate for a set time. That’s usually 1 to 5 years, but it can be as long as 10 years. For that time, your interest rate will remain the same (regardless of cash rate hikes and cuts).
On the other hand, if you’ve taken a variable rate loan, your bank or mortgage lender may increase or decrease your interest rate at any time.
Lenders and banks are guided in their decisions by the cash rate, cost of overseas funding, and the national and international economy. In other words, the more lending costs them, the more borrowing costs you. With the 2.60% cash rate, homeowners should expect higher home loan repayments.
Otherwise, fixed-rate repayments currently mean lower interest rates than the other type. However, once the fixed rate term expires, homeowners will have to face the variable rate loan market.
How Can I Reduce the Interest Paid?
If you’re after a way out, you can use your offset account if your home loan comes with one. It’s an everyday account linked to your home loan account in which you can deposit extra cash.
To calculate your net balance, lenders deduct the offset account balance from the loan account balance, using that value to calculate your loan interest. This way, you pay less interest on your mortgage loan. And although offset accounts cost more, they’re an investment, lessening the effect of interest rate hikes.
Another suggestion is making as many additional repayments with the current interest rate as possible. This way, you won’t suffer as much from future rate hikes.
Impact on Home Buyers
It’s clear that interest rate changes affect the real estate market. Homeowners will probably pay higher mortgage repayments due to the increased interest rate. This might lead them to consider refinancing and applying for another loan; however, the high-interest rates will make it difficult for them to afford one.
So, if you’re an investor, you might want to re-evaluate your investment, especially with home values decreasing, or reduce your expenses to be able to make your mortgage repayments. For instance, you can watch your credit card bill closely, unsubscribe to unnecessary services and subscriptions, and even sell some items. We also recommend consulting your mortgage broker or bank to look at your options.
Another hike in interest rate consequence is the drop in home prices. This was first seen in big cities, such as Melbourne (VIC) and Sydney (NSW), where the home value dropped by 1.6% and 1.1%, respectively, in July.
At any rate, the interest rate rise puts many Australians at risk of losing their properties, especially first-time home buyers and low-income loan holders if they’re not careful. For that reason, we advise you to stay vigilant on your extra repayments so that you’re able to manage them in your current financial situation.