Will interest rates rise in 2022?
The discussion about rising interest rates has reached a climax in recent months. While the exact timing is still uncertain, the market seems confident that we will see at least one rate hike before the end of the year.
This comes as the latest ABS data showed the total value of new home loan commitments hit a record high of $33.7 billion in January.
As Australians are forced to borrow bigger to climb the housing ladder, a possible rate hike could leave many in a tight spot. We look at what the big players in banking are predicting and what you can do to protect your finances.
When do the big banks think interest rates will rise?
The big banks have each estimated the likely timing of the next rate hike. For now, CommBank is the most optimistic in its forecasts, having announced a move for June 2022.
Forecasts for the most important rate hikes by banks
The big banks have backed up these predictions by making big changes to their fixed-rate home loans, and many lenders are following suit.
Fixed interest rates are usually used as a guide for the development of interest rates. When they are higher than floating interest rates, it generally means that banks expect the interest rate environment to rise going forward. Right now, fixed rates are rising at a rapid pace (more on that below).
What does the RBA say?
While a number of private sector economists have said that higher interest rates are just months away, the Reserve Bank of Australia has seized every opportunity to tell us it is in no rush.
At the same time, she admits that a move in 2022 is plausible.
The bank has acknowledged that inflation is ahead of forecasts but is awaiting signs that it will remain sustainably within its 2-3% target range.
But that’s not all it monitors. RBA Gov. Philip Lowe has also made it clear that wages need to be improved before the cash rate can be raised. It all depends on how quickly unemployment can be brought below 4%.
In addition, the RBA is aware that raising rates too suddenly could backfire and hurt borrowers. Official interest rates have not risen in over 12 years, so for many Australians this will be the first time their repayments have risen since they took out their loan.
Home loan rates are already rising
Lenders don’t have to wait for interest rates to rise to raise their mortgage rates. They can do so anytime they think an RBA rate hike is around the corner, or simply because the cost of doing business requires it.
That’s exactly what we saw last year.
When the pandemic struck, the RBA responded by injecting an unprecedented amount of liquidity into the banking system. This allowed lenders to take fixed interest rates to record lows and saw the popularity of fixed-rate mortgages explode.
As the economy improved and that emergency aid was scaled back, lenders quickly reversed course. It didn’t take long for fixed interest rates to return to their normal levels.
At times, mortgage interest rates of less than 2% pa were common for maturities of one to five years. Today, most are gone – and the few that remain are only available for a year or two.
The table below shows how much the average fixed rate (OO, P&I) has changed over the past year among the lenders we track.
Average Fixed Rates (OO, P&I) – changes over 12 months
|expression||Average prices in March 2021||Average prices in March 2022|
|1 year||2.33% pa||2.60% pa|
|2 years||2.31% pa||2.90% pa|
|3 years||2.34% pa||3.31% pa|
|4 years||2.37% pa||3.70% pa|
|5 years||2.62% pa||3.83% pa|
What about variable interest rates?
In stark contrast, interest rates on variable-rate home loans have been falling steadily for some time. At the time of writing, the average floating rate (OO, P&I) is 3.05% pa – down 23 basis points over the last 12 months.
While this trend is expected to continue, everything could change in the short term if the RBA decides to hike interest rates.
When that happens, lenders won’t hesitate to pass on the additional costs to their customers. So if you’ve been tempted by one of the many low variable interest rates, remember that your monthly repayments could look very different in a few months.
So should I fix my home loan?
That depends on what you want from your home loan. While fixed rates could be the pricier of the two right now, floating rates could rise sharply once the RBA begins its tightening cycle.
Westpac economists are betting that the cash rate will be 1.75% by March 2024. Assuming variable interest rates increase at the same pace, this means that the average variable interest rate could be as high as 4.70% pa two years from now.
And until then, the fixed prices for new customers will be even higher.
So if your main priority is securing a low interest rate, it might be worth narrowing your search to the fixed rate loans currently available and avoiding variable rate loans.
If you cannot decide between the two, you can opt for a split loan. This involves asking your lender to split your home loan into two accounts, one with an adjustable rate and the other with a fixed rate.
This can be a good way to hedge against future interest rate increases while also ensuring that you don’t miss out on many of the features typically associated with adjustable rate home loans, such as the ability to make unlimited additional repayments and access a compensation account.
To find out how much you could pay if interest rates went up, use our home loan amortization calculator. For more information on housing and lending trends, visit our home loan statistics page.
* WARNING: This rate of comparison applies only to the example or examples provided. Different amounts and maturities lead to different comparison rates. Costs such as withdrawal fees or prepayment penalties and cost savings such as fee waivers are not included in the settlement rate, but may affect borrowing costs. The comparative interest rate shown is for a secured loan with monthly principal and interest payments of $150,000 over 25 years.
** The initial monthly repayment numbers are estimates only, based on the advertised interest rate, loan amount, and entered term. Rates, fees and charges, and therefore the total cost of the loan, may vary depending on the loan amount, loan term and credit history. Actual repayments will depend on your individual circumstances and changes in interest rates.
^See information on the Mozo Experts Choice Home Loan Awards
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