Home loan interest rates could rise as early as 2022
It seems the era of record low interest rates could soon be over as Commonwealth Bank economists predict the Reserve Bank of Australia could raise the cash rate as early as 2022.
The cash rate has been left at 0.10 percent since November last year, with the most recent cash rate hike now being over a decade ago. Reserve Bank of Australia (RBA) Governor Philip Lowe hinted that we may not see a cash rate increase until 2024, when inflation targets may be met and term funding ends.
That could change soon, however, as CBA’s Australian economics director Gareth Aird said their projections contradicted the 2024 deadline for the past six months.
“Our message has been consistent and unwavering: the labor market will tighten quickly, and that means wages and inflation will rise, especially because the labor supply is limited,” said Aird.
Their predictions pointed to a 15 basis point rate hike by the RBA in November 2022.
As a sign of what’s to come, just last week CBA raised its serviceability floor from 5.10 percent to 5.25 percent – the highest rate of any big four banks.
When a lender tests your eligibility for a home loan, they ensure that borrowers can afford to pay back the loan 2.5 percent above the current current rate or its internal usability floor, whichever is greater.
RateCity Research Director Sally Tindall said, “The RBA will not raise rates without warning. It has become a habit to inform us in good time. “
“When the time comes, the RBA will raise the cash rate with a slow and steady hand.”
But for those households that bought at the height of the market and may now face interest rate hikes on gigantic mortgages, there is still time to prepare.
“The RBA will want to see sustained wage growth before committing to multiple rate hikes,” Tindall said.
“If it doesn’t, some families could default on their loans and that’s the last thing anyone wants. People can cushion the blow of future rate hikes by moving forward on their home loan now.
“Although many mortgage holders currently have a fixed rate that usually has caps on additional repayments, they still pocket some extra money and every dollar counts,” she said.
RateCity tips for rate hikes
Similar to death and taxes, interest rate fluctuations are to be expected with a mortgage with a term of 25-30 years. Right now there is a whole generation of new buyers who have never seen a rate hike.
Regardless of whether the cash rate is raised in 2022 or 2024, it may be worth checking your budget and considering the following tips to help protect yourself from mortgage stress.
- Consider making additional repayments. If your home loan allows you to make additional repayments, and you can schedule that additional payment in, this can be worth considering. Paying off the principal on your home loan is a way for households to reduce their ongoing mortgage repayments and the overall interest burden.
- Use your offset account. Another way to reduce your capital and keep interest repayments low is to use your compensation account. Any funds you deposit into this account will “offset” the principal amount on your mortgage, which means your repayments will be reduced. For example, if you have a $ 500,000 mortgage with $ 30,000 in the compensation account, the repayments will be as if you had a $ 470,000 mortgage.
- Ask your bank for a rate cut. Lenders usually reserve theirs more competitive new customer rates to get them on the books. If you’ve been a loyal customer for a while and have put some equity into the loan, go online and see what rates are being offered to new customers. You would be surprised what a lender is willing to do to make you happy if you just ask.
- Consider refinancing. If you are still unhappy with what your home lender is charging you, someone else Refinancing is the option. By switching your mortgage to a cheaper lender, you reduce your mortgage repayments and the amount of interest you accrue. Also, some are lenders Offer refinancers competitive cashback offers to make refinancing a little easier. Just make sure you read up on the time and cost of the refinance before committing to this financial decision.