When interest rates rise, how much more will your mortgage cost?

It's easy to ignore the possibility of interest rates rising after 18 consecutive RBA rate decreases. But, if the cash rate were to rise to levels seen in mid-2019, how much more might a new mortgage holder anticipate to pay each month? Let's have a look at what we've got.

What went up must come down, they say.

But does everything that goes down have to come back up? The large banks believe so, and they believe it will happen sooner than most people expect.

While the RBA kept the official cash rate at 0.10 percent this month, reiterating that it does not intend to raise it until 2024, there is rising speculation that the next rate hike could happen as soon as late 2022.

Commonwealth Bank and Westpac forecasted a rate hike in late 2022 or early 2023 in June. In fact, in the third quarters of 2023 and 2024, they predict the official cash rate to reach 1.25 percent.

Meanwhile, NAB increased its 2-, 3-, and 4-year fixed rates for owner-occupiers paying principal and interest by up to 0.10 percent this week.

Banks can raise fixed rates to avoid rate hikes by the Reserve Bank of Australia. In general, the shorter the timeframe of a fixed-rate increase (for example, if 2-year fixed rates are increased), the sooner a bank expects the next rate hike.

So, if the experts at the big banks are correct, how much more should you add into your monthly mortgage payments if the official cash rate rises to 1.25 % by 2023/24?

How much more could a typical mortgage holder expect to pay?

The first point to remember is that the RBA’s cash rate goal was last set at 1.25 percent in June 2019 – not that long ago (but wow, was it a different world back then!). 

 

Based on the current difference between the two rates, Canstar’s modeling, which was published on Domain, reveals that the average variable mortgage rate would rise from 3.21 percent to 4.36 percent.

If you took out a $500,000 loan tomorrow and the cash rate rose to 1.25 % in 2024, your monthly payments would rise $300 to $2464 per month, according to the modeling.

According to ABC News’ modeling, repayments would increase by $324 per month in a comparable scenario.

That’s despite the fact that you’ve reduced your outstanding loan balance to $468,770 after three years of payments and presuming the banks just add on the cash rate hike – not anything else.

Then there’s the likelihood that the RBA will raise the cash rate again in the near future.

Canstar forecasts that if the average variable loan rate rose to 7.04 % in 2031, from where it was just a decade ago in 2011, the same borrower who took out a $500,000 loan would pay $900 more in monthly repayments than they do now – even after a decade of repayments.

We can go over your alternatives with you.

It’s difficult to believe that interest rates will climb from the current record low cash rate.

In fact, you had to go all the way back to November 2010 to find the last time the RBA raised the cash rate (to 4.75 % ). Since then, we’ve had a run of 18 consecutive cuts.

The economists at the big banks, on the other hand, aren’t basing their modeling, predictions, and fixed-term rate hikes on thin air, and it pays to pay attention.

So, if you’re concerned about the impact of rate hikes on your household budget in the coming years, contact us today and we’ll walk you through your options.

Fixing your interest rate for two, three, four, or five years, or just a portion of your mortgage, is one option (but not all of it).

Every household is unique, and it is our goal to assist you in determining the best mortgage option for you!

To learn more, contact Premium Finance Group Australia at (07) 4720 8888 or email us at finance@pfga.com.au

Disclaimer: The content of this article is general and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your situation and may not be relevant to circumstances. Before taking any action, consider your particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced, or republished without prior written consent.

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