Record-low rates may soon be a thing of the past, with economists tipping the Reserve Bank of Australia (RBA) to start increasing the 0.10 per cent cash rate as early as the second half of this year. But, the big four banks, as well as many other lenders, now expect rates to start rising from June.
For buyers and owners alike, the timing and magnitude of any rate rise will be closely watched, as an increase could mean hundreds of dollars more in mortgage repayments per month.
When the RBA increases the cash rate target, often referred to as the official interest rate, lenders typically pass the change on to customers in the form of higher interest rates on variable home loans.
If interest rates went up by 0.25 of a percentage point, borrowers who have taken out a $500,000 loan on a 30-year term could expect to pay an additional $65 per month on their mortgage. For those with a $1 million loan, it could mean an additional $131 per month.
So when could interest rates rise, and what can borrowers do to prepare?
Until late last year, the RBA’s central scenario was that economic conditions requiring a rate rise wouldn’t be met until 2024.
But the recent rise in inflation, low unemployment putting pressure on wage growth and rate adjustments by other central banks have all increased the likelihood of a rate rise sooner than previously expected.
While an increase is on the horizon, the RBA is in no rush to lift the cash rate, says Dr Diaswati Mardiasmo, PRD Real Estate’s chief economist.
“At the very, very earliest they could lift in the second half of 2022,” she says. “But, with the uncertainty that comes naturally with the federal budget and federal election, I wouldn’t be surprised if they held off until the later part of 2022.”
While the outcome of the federal election could play a part in when the rate change occurs, inflation levels and wage growth would take precedence in the decision, Dr Mardiasmo says.
“Inflation has recently shot up,” she says. “It’s at 3.5 percent at the moment, which is just outside the RBA’s healthy bandwidth of 2 to 3 per cent.”
But while inflation is currently high, and will continue to climb due to ongoing supply-chain issues and developments in global energy markets, Dr Mardiasmo says the RBA is prepared to wait and see whether these pressures sustain inflation before lifting rates.
Another factor the RBA is prepared to patiently wait out is wage growth.
“The RBA has said that they would like to see wage growth anywhere between 3 to 4 per cent,”’ Dr Mardiasmo says. “At the moment our wage growth is still under 2 per cent, so we’re not there yet.”
While the prospect of rising interest rates can be nerve-racking, there are things property buyers and owners can do now to soften the impact.
1. Review your budget
In times of financial uncertainty it’s important to review your budget, says Laura Higgins, senior executive leader of the Australian Securities and Investments Commission’s Moneysmart.
“Make sure you can meet your financial commitments now, but also [ensure] you’re organised in a way that you can meet your future commitments should interest rates change,” she says.
Building up a sizeable buffer in your budget now could help you stay on track when rates rise in the future, says Marcus Russell, senior home loan specialist at Domain Home Loans.
“People are making things work with their current budget, but if interest rates suddenly rise they may find themselves in the red,” he says. “Building up a stable buffer now could help set you up for the future.”
2. Get a better deal
Locking in a lower interest rate now could help save you thousands of dollars in repayments on your mortgage in the future.
For current homeowners, Ms Higgins says it is worthwhile exploring options beyond your current bank or lender.
“Many times new customers are offered a better deal than existing customers,” she says. “If you haven’t revisited your home loan with your bank for a few years, you could potentially get a better deal and save quite a bit of money by switching.”
3. Review your loan structure
Looking at the current arrangements of your home loan and assessing whether they still suit you is an important part of preparing for a rate increase, says Ms Higgins.
“Are there additional costs you’re paying, for instance, because you perhaps have an offset mortgage, but maybe you’re not using it that way?” she says. “This is a conversation you may want to have with your current bank or lender.”
Mr Russell says it’s important to check in with your home loan regularly, regardless of what interest rates are doing.
“I recommend thinking about it every six months, talking to a significant other about it once a year and talking to a professional or your broker every one, one-and-a-half years,” Mr Russell says.
4. Make extra repayments
“Interest rates have been low, but they probably won’t be this low forever,” Ms Higgins says. “So, making some extra repayments now could be beneficial.”
Mr Russell says making additional payments of $200 or $250 per month could safeguard you when interest rates rise: “Making extra repayments to your mortgage or syphoning off extra money into a separate account or your offset facility could pay dividends in the long run.”
5. Know your lender’s hardship provisions
Understanding your lender’s financial hardship provisions is an important part of preparing for a rate increase, Ms Higgins says.
“If people are struggling to make repayments the first place to start is with their bank or lender,” she says. “Your lender should have support available for their customers and options to assist people when they are suffering from hardship, particularly if it’s short-term.”
For more significant or long-term financial difficulties, Ms Higgins says free financial services such as the National Debt Helpline (1800 007 007) are available.