As of November 2022, The Reserve Bank of Australia (RBA) has raised the cash rate for seven straight months, sending interest rates on home loans soaring.
Since interest rates hadn’t gone up in 12 years prior to the recent hikes, this is the first time many homeowners have ever dealt with rising rates.
We know this environment can be stressful – whether it’s new to you or not. To help, we’ve compiled a list of frequently asked questions about interest rates and how they affect homebuyers and homeowners.
Why Are My Interest Rates Rising?
When the cash rate rises, the cost of borrowing for the lender increases. The lender will pass on the cost to their customers through interest rates.
When the cash rate rises:
- Some savings account will get a higher interest rate
- Your variable home loan will get a higher interest rate.
For example, if the RBA increases the cash rate by 25 basis points, most lenders will increase their variable home loan rates by roughly the same amount.
The good news is that if you have a fixed home loan, you’re not affected by rising interest rates until your fixed term ends.
What Is The Cash Rate?
The cash rate is the market interest rate commercial banks charge one another for overnight loans. It is also known as the bank rate or the base interest rate.
The RBA is responsible for monitoring and changing the official cash rate for Australia. It can raise, hold or cut the cash rate target to manage the Australian economy – precisely, to control inflation.
You can read about the difference between the cash rate and interest rates here.
Why Did The RBA Start Increasing The Cash Rate In May 2022?
The goal of increasing the cash rate is to cool down inflation by encouraging people to save more and spend less.
Extraordinary monetary support was put into place to protect the Australian economy during the pandemic. This helped the economy remain resilient, but inflation picked up and has remained at a higher level. It is still well above the RBA’s long-term inflation target of between 2% and 3%. Right now, inflation is at 7.3%.
RBA governor Philip Lowe said the high inflation numbers, better wage growth, and a low unemployment rate indicated a time for “normalising” interest rates following the emergency lows during the pandemic.
Why Do Some Lenders Increase Their Interest Rate More Than The Cash Rate?
Non-bank and specialist lenders obtain their funds in different ways than banks, so their cost of funding is higher. They pay more to get the funds they lend to their customers, so they pass this cost to their customers through higher interest rates.
Read our page on non-bank lenders to learn more about them and if they’re a suitable option for you.
How Much Will Interest Rates Rise?
It isn’t easy to pinpoint how much interest rates will rise. For now, many economists predict that the cash rate will increase through the first half of 2023.
You can use our repayment calculator to work out how much your repayments will be.
What Is The Lowest Rate In The Market?
Lenders determine home loan interest rates based on their funding costs and risk appetite.
You can view our interest rate page to find the lowest rate available from our panel of over 50 lenders.
Please note that your eligibility for interest rates depends on your financial situation and qualifications.
Should I Fix My Interest Rate?
We had a client who asked us: “I have a fixed loan rate of 2.29% that expires in October 2022. Since the interest rates started increasing, I wanted to know if I should re-fix my home loan?”
Like most things, it depends on your situation. You can consider fixing your home loan if you cannot withstand further interest rate rises.
A fixed-rate home loan provides stability and assurance of the same repayment amount during a set period. However, it comes with limitations, like no access to offset and redraw accounts and high break costs. Also, remember that when the term ends, your rate will revert to a variable rate that your lender chooses.
If possible, you can opt for a split loan option that gives you the freedom to divide your home loan into fixed and variable portions.
Talk to our mortgage brokers about what option is right for you. Call us on 1300 889 743 or enquire online today.
What Can I Do If I Can’t Afford Higher Repayments?
- Immediately inform your mortgage broker or lender so you can request hardship repayment assistance if needed.
- Refinance to a lender who understands your predicament and can lower your repayments
- Talk to your existing lender about ways to lower your repayments without refinancing.
- Consolidate your debts into your home loan, so your repayments are lower and manageable.
- Make good use of an offset account.
- If you can, rent out a spare room to earn extra income and manage your repayments.
- We know lenders who accept second income or other income sources when you apply for a home loan or refinance.
Are you worried about the home loan interest rate rise?
The mortgage brokers at Home Loan Experts are here to help you navigate the rising rate environment, so you get a good deal on your home loan.
If you already have a home loan, we can help you refinance to a lender and lower your repayments.
Call us on 1300 889 743 or enquire online to talk to an expert today!