Home loan interest rates may soon rise, what will this mean for your mortgage?

While the Reserve Bank of Australia has insisted that interest rates will not rise until 2024 at the earliest, a growing number of economists are beginning to question the Bank’s outlook.

Commonwealth Bank recently joined ANZ and Westpac in presenting its rate hike forecast. He now expects the RBA to hike rates by 0.15% in November 2022 and 0.25% in December 2022.

He also forecast three more increases of 0.25% in the first three quarters of 2023, which would leave the cash rate at 1.25% in just two years.

Recent moves in the home lending space suggest that the big banks aren’t the only ones beginning to doubt the RBA’s guidance, with several lenders raising long-term fixed rates or quietly removing discount offers.

Since entering into a fixed rate deal requires banks to lock in their funding costs for a set period of time, fixed rates tend to signal what the market thinks the interest rate landscape will look like in years to come. future.

At present, short-term interest rate cuts continue, suggesting that lenders are quite confident that there is still some time before the RBA takes action.

But the picture is quite different when we look at long rates, as shown in the chart below.

Among the lenders we track, the 4-year average rate currently stands at 2.49% pa (from 2.37% pa in March 2021), while the 5-year average rate is 2.74% per year (compared to 2.62% per year in March 2021).

Average fixed mortgage rates

So what does this mean for mortgage holders?

According to Mozo banking expert Peter Marshall, banks and lenders are already behaving as if an earlier-than-expected rate hike is a certainty.

“If lenders think the cash rate is going to rise, they will raise their rates regardless of what the RBA says about the timing of future rate increases,” he said.

So what does this mean for current mortgage holders? Assuming the cash rate reaches 1.25% by September 2023 and lenders raise rates in line with the RBA, the average floating rate on home loans could rise from 3.27% per annum to 4.42% per year.

For homeowners paying off a $500,000 loan over 25 years, that could mean additional monthly repayments of $315, or $3,780 per year.

Today’s long-term fixed rates, while no longer the cheapest of the lot, are starting to look much more attractive by comparison.

“If people consider the restrictions (prepayment charges and additional repayment limits) and can get a rate that works for them, now is a good time to consider long-term fixed rates,” Marshall said. .

What stands in the way of an early rate hike?

Analysts predicting a rate hike in 2022 or 2023 have touted a stronger-than-expected economic recovery, but there is one area where the RBA and the government have struggled to get things moving: wage growth.

In a speech earlier this month, RBA Governor Philip Lowe said the wage price index had risen just 1.5% over the past year as companies preferring to “wait and ration” rather than offer higher wages.

“It is understandable that the focus is on costs: if profits cannot be increased by developing or increasing prices, then it must be achieved by reducing costs,” he said.

“It has become the predominant mindset of many companies. This mindset can be helpful in making businesses more efficient, but it also has the effect of making wages and prices less responsive to economic conditions.

But the big banks are not convinced this is the problem the RBA claims to be.

The latest NAB Business survey shows labor costs rising and CommBank economists expect wage growth to accelerate to 2.4% per year by the end of 2021 and to 2.9% per year by the end of 2022.

This, combined with the strength of the recovery in other areas, could be enough to force the hand of the RBA.

For more information on interest rates, visit our home loan statistics page. And if you’re looking for a home loan, browse our home loan comparison page, where you can filter your search by rate and type.

* ATTENTION: This comparison rate only applies to the example or examples given. Different amounts and durations will result in different comparison rates. Costs such as withdrawal charges or prepayment charges, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate shown is for a secured loan with monthly principal and interest repayments of $150,000 over 25 years.

** Initial monthly repayment figures are estimates only, based on the advertised rate, loan amount and term entered. Rates, fees and charges, and therefore the total cost of the loan, may vary depending on your loan amount, loan term and your credit history. Actual repayments will depend on your personal circumstances and changes in interest rates.

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Bernadine J. Perkins