Rates are continuing to increase in 2022.

It’s understandable that homeowners are anxious about what a rate increase will mean for their mortgage.

In May, the rate rose from 0.10% to 0.35%, an increase of 0.25. It has increased in June from 0.35% to 0.85%, which has been the largest leap so far of 0.50%.

We asked Matt Gatt, Compare Club Home Loans' General Manager and all-round mortgage expert about what the RBA’s predicted cash rate hike may mean for your home loan.

Key Points

  • Lenders have gradually raised their interest rates since last spring, indicating that they’re preparing for a rate rise.

  • A rate rise means that those paying a variable rate mortgage will likely experience costlier repayments.

  • Now could be the best time for refinancers and buyers to compare their options and secure a competitive rate.

  • Whether you’re buying or refinancing, Compare Club can help you find the best rate for your needs from a panel of over 40 mortgage lenders.

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Rates continuing to increase

The RBA (Reserve Bank of Australia) has provided several indications that the official cash rate target is set to rise either in 2022 or early 2023.

Lenders are clearly taking these indications seriously.

Matt recommends that anyone thinking about refinancing their home loan or selling should act fast to maximise their savings.

“The RBA is likely to act in 2022, so there's more to be saved by acting sooner rather than later."

What time is the RBA rate decision?

The RBA meets on the first Tuesday of each month to decide on monetary policy, with any changes they make coming into effect the next day.

Why do interest rates go up and down?

The Reserve Bank of Australia controls the national interest rate (cash rate) to ensure we have a stable currency and avoid high inflation rates.

The RBA will examine the growth of the Australian economy and decide whether to slow it down by raising the cash rate or speed it up by lowering the cash rate.

Several factors influence the rise and fall of interest rates, including:

  • Employment and wages growth - If employment levels are low, the RBA will be more inclined to lower the cash rate as a means of stimulating investment and creating more jobs. Similarly, slow wages growth can indicate slow economic growth and will make it more likely for the RBA to keep the cash rate where it is.

  • Inflation - One of the RBA’s ongoing goals is to keep the inflation rate between the 2 and 3 per cent target range. If the rate of actual inflation looks like it will exceed 3%, the RBA will be inclined to increase interest rates to help consumers retain their level of buying power.

  • Growth of the Australian economy - GDP represents the value of all goods and services produced in Australia. If it falls too low, the RBA may lower the official cash rate target to help stimulate the economy (if interest rates are lower, more people will buy houses, open businesses, make investments etc.)

How does the Reserve Bank of Australia’s cash rate announcement affect interest rates?

The official cash rate affects how expensive it is for banks and other financial institutions to borrow money from one another in the overnight market.

This exchange of short term ‘overnight funds’ is how lenders ensure they can meet their liquidity needs each day.

Simply, if it becomes more expensive for lenders to borrow money, they may pass on this expense to consumers by increasing the interest rates on their products (such as home loans).

How do interest rate changes affect me if I’m looking to buy property?

If the official cash rate changes and lenders respond by changing their mortgage rates, how expensive it is for you to buy property will naturally change too.

A higher interest rate means that your mortgage will have higher monthly repayments and, consequently, will take longer for you to pay off.

With an expected cash rate rise looming (and lenders gradually raising their rates in response), Matt says, “Homeowners should factor potential home loan interest rate rises into their decision making process.

Banks continually putting up rates shows the importance of locking in a home loan rate as soon as possible, whether you're refinancing or buying.”

How do interest rate changes affect me if I already have a mortgage?

If you’re already paying off a variable rate mortgage, then any changes the lender makes to the loan’s interest rate will affect the cost of your repayments.

So, if the RBA increases the official cash rate, you will likely pay more for your mortgage each month.

However, if you are still paying off a fixed rate portion of your mortgage, your repayments won’t be affected since you locked in your rate.

But once the fixed rate period ends, you will have to pay whatever variable rate the lender has set.

If you currently have a mortgage and are worried about the impact of a rate rise on your repayments, it may be worth thinking about refinancing to secure a better rate early.

Matt says, “Banks have already been raising their rates since last spring and every month you wait to refinance, you're potentially throwing away thousands in additional savings needlessly.”

How much more will I pay if interest rates go up?

The answer really depends on:

  1. The decision from the Reserve Bank of Australia.

  2. How your lender adjusts interest rates in response.

Keep in mind; the RBA’s decision is not the only factor lenders look at when adjusting their interest rates.

How can I make sure I’m on the best home loan rate for me?

Even without a predicted rate rise on the horizon, it’s always good to periodically reassess your mortgage and see whether you can get a better rate.

Matt highlights that “Homeowners have a greater choice around fixed, variable or a combination of the two, and that puts them in a great position to potentially secure a rate below 5%.”

It’s a good idea to negotiate with your current lender to see what rate they are willing to offer to keep you.

Be careful not to agree to the first offer they make, as while it might be lower, it may not be the best you can get.

A quick and easy way to see if you can get a better deal is to use a service like Compare Club which compares lenders to find you the best option.

By comparing home loans, you can get ahead of the rate hike and potentially switch to a better deal.

Get started with Compare Club today and see if you can get a better deal on your home loan.

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The information contained on this web page is of general nature only and has been prepared without taking into consideration your objectives, needs and financial situation. As such, it is important that you consider the appropriateness of the advice and the relevant product disclosure statement (PDS) before proceeding. Any opinions expressed within an article are those of the author and do not specifically reflect the views of Compare Club Australia Pty Ltd.