Homebuyers in Australia are currently being offered some phenomenal deals from lenders – and this is mostly because the official cash rate is at an all-time low. In November 2020, the RBA dropped the official cash rate in Australia to just 0.10%…and it’s been sitting there ever since. As a result, many lenders lowered their interest rates to less than 2%, which then led to a huge increase in the number of people who wanted to refinance home loans. Of course, this is fantastic for Aussie homeowners and many have been able to access some great savings by refinancing to a better interest rate. But unfortunately, all good things must eventually come to an end. And, sooner or later, the RBA will have to increase the official cash rate. When that happens, how much will it cost you?
When Will Interest Rates Start Going Up?
The RBA has repeatedly said that they don’t intend to raise the cash rate until 2024 at the earliest. However, some in the finance industry suspect that a strong economic recovery from COVID will lead to the cash rate going up much sooner. Both Westpac and CBA have confirmed they’re expecting the cash rate to start going up in late-2022/early-2023, before eventually hitting 1.25% in 2024.
But this doesn’t mean interest rates won’t start moving up until the cash rate does. In fact, some of the big banks have already started increasing their fixed interest rates in anticipation of an RBA rate hike. CBA and Westpac upped their 4- and 5-year fixed interest rates back in April, followed by a similar move from NAB in May. Since then, lenders have also slowly started increasing their 2- and 3-year fixed interest rates.
How Much Would an Interest Rate Rise Cost You?
Most lenders automatically roll borrowers over to a standard variable rate once their fixed term expires. So, if the fixed term on your home loan has already expired (or is due to expire shortly), how much would an interest rate rise cost you?
According to recent modelling completed by Canstar, if the RBA cash rate rose to 1.25%, then the average variable interest rate would increase from 3.21% to 4.36%. Now, at first glance, an increase of 1.15% might not sound like such a big deal. But let’s look at a real-world scenario using the PLS Loan Repayment Calculator:
If you had a 30-year home loan with a balance of $650,000 and an interest rate of 3.21%, your monthly repayments would be $2,814.59. But if your interest rate went up to 4.36%, your monthly repayments would increase to $3,239.61. That means you’d be paying $425 more every month, which adds up to just over $5,100 extra in the first 12 months alone!
How Can You Avoid the Interest Rate Rise?
If you think you might be adversely affected by an interest rate rise, then it’s a good idea to start considering your options now. It could be worth refinancing your home loan to lock in a more competitive fixed rate mortgage product… before interest rates start going up even more! To get started, contact me on Ph: 0421 934 033 or Ph: 07 5597 6049.