It’s official. After months of speculation it finally happened.
The Reserve Bank of Australia (RBA) raised interest rates by 0.25 percent. It’s the first interest rate rise since November 2010 and for a generation of home loan borrowers, rising interest rates may come as something of a shock. While it’s true this small rise of just 0.1 percent takes the cash rate to a still tiny 0.35 percent, more rate rises have been predicted between now and the end of 2022. Not to mention if you’ve never had to grapple with rising interest rates, you’re in for a steep learning curve.
With the cost of living continuing to soar and petrol prices through the roof, it’s an interesting time for new borrowers and mortgage holders.
So, what will this and other interest rate rises mean for you?
Why are interest rates rising now?
With everything currently happening in the world and so many people struggling as we move into our third year of the pandemic, you’d be correct in asking why now? Why are interest rates rising?
The main reason is rising inflation, as evidenced by everyday things like sky-high fuel prices and cost increases for just about everything in your shopping basket. Inflation is monitored closely through the Consumer Price Index (CPI) which looks at the cost of a basket of goods and services the average person would buy.
Inflation and interest rates are tied to one another with rates being raised to make borrowing money more expensive. The flip side is you’ll start to earn more money on your savings and investments, including your superannuation.
How much more will interest rates rise in 2022?
Nobody knows exactly what the RBA will do next. Economists, banks and the media can only speculate, albeit highly educated (and usually rather accurate) speculation. Having said that, most big banks predict interest rates will rise by between one and two percent by the end of 2022. This means the average variable home loan interest rate would creep up to somewhere between four and five percent.
It’s worth noting the RBA board meets on the first Tuesday of every month (except January) to discuss monetary policy. It’s on this day any cash rate changes are announced to the public. While nobody is expecting seven more interest rate rises in 2022, that’s how many meetings there are left between now and the end of the year.
However, with so many other factors currently at play, including the global move into the endemic period and a war raging in Europe, just how far rates will rise is just speculation.
What happens to my fixed rate home loan?
A fixed rate home loan means your interest rate is fixed for anywhere between one and five years. This means it doesn’t matter how many interest rate rises there are for the duration of your fixed term, your monthly loan repayments will not increase. This gives you some much needed breathing space to prepare for the inevitable rate rise when your fixed term comes to an end.
And this is perhaps when we should remind you that, unlike those with variable home loan interest rates, your interest rate will leapfrog to the current rate when your fixed rate term expires. There’ll be no slow and steady increases. It will be one big leap.
What happens to my variable rate home loan?
Your monthly repayment amount will increase the moment your lender decides to pass any interest rate rise onto borrowers. Some lenders do this immediately, others wait a little longer to see how the dust settles. With rises happening in small increments (for now), it should be easier to adjust household budgets to meet costs. Unlike those on fixed rate home loans, you won’t see a sudden jump from one month to the next.
Should I let my current loan buffer deal with the rate rises?
It’s been widely reported that, during the pandemic when Australians were in lockdown, couldn’t travel or use their disposable they way they usually did, they sank these extra funds into their mortgages. This means many people now have a healthy buffer, meant to shield them from any interest rate rises. Now interest rates are on the rise, should you be increasing your monthly repayment or let your buffer do its thing?
This is only a question you can answer and will depend largely on your current financial circumstances. Perhaps speak to your financial advisor or mortgage broker about the best way to move forward, now we’re actually dealing with rate rises and not just hypotheticals.
As your local Melbourne mortgage broker, I’m here to help you make sense of interest rate rises and how they could impact you and your family. Especially if you’ve never experienced a rate rise and may be feeling a little confused and lost.
Let’s set up an appointment and chat about your options and how we can help you navigate the interest rates rises of 2022.