The importance of being ready for interest rate hikes
How well prepared are you for a rise in interest rates? While that may seem like an odd prospect for many of us after 18 consecutive cash rate cuts from the RBA, we always need to be prepared.
And when the big banks start showing signs, it’s time to consider what that might look like for you in a practical, month-to-month sense.
What would an interest rate rise look like for you and how much extra would a new mortgage holder expect to pay each month?
RATE RISE PREDICTION:
While the RBA’s official position has been that it doesn’t expect to lift the lid on the cash rate until 2024, and this month held the rate at 0.10 per cent, there’s healthy speculation that the next rise in rates could arrive as early as 2022.
Westpac and the Commonwealth Bank have earmarked the period between late 2022 and early 2023 as a likely time when rates may start to spring up, with the official cash rate predicted to hit 1.25 per cent in the third quarter of 2023 and peaking in 2024.
Meanwhile, NAB increased its two, three and four-year fixed rates by up to 0.10 per cent for owner-occupiers paying principal and interest.
Banks have the ability to increase fixed rates as a method of heading off potential RBA rate hikes. In overall terms, this means that the shorter the length of term of the fixed rate that is increased, the sooner a bank is expecting the next increase in rates will be.
Generally, the shorter the term of the fixed-rate that’s increased (ie. if two-year fixed rates are raised), the sooner a bank may predict the next rate hike will be. And with economists at the big banks seeing that future in their crystal balls, how should you be planning to make the most of it and how much extra money should you be factoring into your monthly mortgage repayments if the official cash rate starts to rise?
THE HIP-POCKET IMPACT:
You’d have to cast your mind back to 2019 to find the last time that the RBA cash rate target was at 1.25 per cent. Although it wasn’t that long ago, it seems like a completely different world - before the global COVID pandemic appeared like an unwanted neighbour at a backyard barbeque.
So, just how much extra should the average mortgage holder expect to pay?
Modelling provided by Canstar showed that the average variable mortgage rate would jump from 3.21 to 4.36 per cent, based on the current gap between the two rates.
In plain English terms, this means that if you took out a $500,000 loan tomorrow, and the cash rate hit 1.25 per cent in 2024, the modelling estimates your monthly repayments would increase $300 to $2464 per month. Commonwealth Bank's modelling covers a similar scenario, with repayments up $324 per month.
That’s despite shrinking your remaining loan balance to $468,770 after three years of repayments, and assuming the banks only add on the cash rate increase – and not any extra. On top of that, there’s also the possibility that even more waves of RBA cash rate increases could soon follow.
So if the average variable loan rate increased to 7.04 per cent in 2031, where it was not that long ago back in 2011, Canstar estimates that same borrower who took out a $500,000 loan would pay $900 more in monthly repayments than they do now, even after a full decade’s worth of repayments.
TAKE OUT THE GUESSWORK:
Every household is different, in unique situations and you can’t take a one-size fits all approach. Let us run you through your options and help you find the right mortgage option for you.
It may be difficult to imagine that interest rates could rise from the relaxed position of the current record low cash rate, however it’s vital to pay close attention. We had 18 cash rate reductions before the RBA increased the cash rate to 4.75 per cent back in November 2010.
It pays to look ahead, if you’re worried about what such a scenario could mean for you and your home budget in the coming years, get in touch with us today and we can run you through a number of options that include (but are not limited to) fixing your interest rate for two, three, four or five years, or just fixing part of your mortgage (but not all of it).
