Big Four banks predict rate rise next week: Are you prepared?
Australia's cash rate, which is the rate that variable home loans are based on, is currently at a record low 0.1%, but banks expect it to climb to 2% by next year.
We've been expecting interest rate rises to happen eventually. But many mortgage holders are set to experience some serious bill shock in the next 2 years, as economists had previously predicted we wouldn't see rates rise until at least 2024.
In the face of rising inflation, they've done an abrupt about-face, and now the big banks' economists are forecasting rate rises as early as May, with many more to come.
Every month, we canvas 40+ experts and review their forecasts, so we can find out the chances of an RBA cash rate cut or rise in the near future. Here's the official forecast right now:
- CommBank: Gareth Aird, Commonwealth Bank of Australia's head of Australian economics, is sticking with its forecast of 0.4% increase in June. He forecasts a cash rate of 1.0% by the end of 2022, rising to 1.25% by early next year and remaining at that rate for 2023.
- ANZ: David Plank, Head of Australian Economics at ANZ, said following higher than expected inflation, he now expects the RBA to lift the cash rate by 15 basis points to 0.25% in May. He tips another 0.25% rate hike in July, August and November, taking the cash rate target to 1% by the end of 2022.
- NAB: National Australia Bank has brought forward its rate increase projections to next month from June. It predicts a number of 0.25% increases over the next few years, expecting the cash rate to land at 2.25% by December 2024.
- Westpac: Chief economist Bill Evans has also brought forward his prediction of a 0.40% interest rate hike from June to May. He believes that the cash rate will be around 2% by the middle of next year.
Other market analysts and insiders are predicting the cash rate could climb as high as 3.5% by Christmas 2023, which would be a massive blow to first homebuyers who have bought into the property market right as prices peaked.
However, other economists believe huge rate hikes of this magnitude aren't likely, given the substantial negative impact it will have on home owners and the housing market overall.
While it's impossible to predict exactly what will happen, it is possible to get prepared in advance.
1. Consider fixing your rate
It may be too late to lock in your home loan to an ultra-low fixed rate for the next few years, as the banks have already hiked them. But 1-year rates are still quite low, and locking in your loan now could be suitable for those who want the peace of mind of knowing exactly what their repayments will be.
2. Check whether you're paying too much
The variation between rates for home loans is huge, so find out your current rate and compare it against the market. If you find you're paying more than you need to, call your bank immediately and ask for a discount. Ask to speak to the retention team and threaten to refinance elsewhere if they can't offer you a competitive deal.
3. Follow through!
If they're not willing to budge, move your loan. You might be able to refinance to a different variable rate loan with a cheaper rate, get a home loan with an offset facility that helps you pay less interest, or apply for a loan with a cashback offer of $2,000-$4,000, which you can stash in the bank to help deal with higher repayments as a result of future rate rises.
4. Refinance over a fresh 30-year period
Some people don't agree with this strategy, as it means you're repaying your debt for a longer period. But it can be a really helpful way to manage your mortgage when rates are rising.
Say you took out a $700,000 principal and interest loan 5 years ago, and you have $630,000 remaining on your balance. Your repayments today are $2,800 with an interest rate of 2.5%, and you have 25 years left on your loan.
You could refinance your debt of $630,000 to a new 30-year loan term. Even if interest rates increase by 1% to 3.5%, your repayments will be lower because they're based on $630,000 over 30 years, not 25 years. Your repayments would increase to $2,830, an increase of just $30 a week, whereas under your previous $700,000 loan, they'd jump to $3,140 a month.
5. Don't bury your head in the sand
Lastly, make sure you're as informed as possible about what's ahead in terms of how your repayments could increase. Plug your mortgage into a home loan calculator to see how much your payments are likely to increase by, if rates jump 0.5%, 1% or even more. This allows you to see exactly how much you need to budget for in the future, so you can start to make plans now about how you'll manage.
How much could your monthly mortgage repayment increase by?
|Interest rate||$600,000 home loan*|
|2.1% variable rate (cash rate 0.1%)||$2,250 – current amount|
|2.5% variable rate (cash rate 0.5%)||$2,370 – up $120|
|3% variable rate (cash rate 1.0%)||$2,530 – up $280|
|3.5% variable rate (cash rate 1.5%)||$2,700 – up $450|
|4% variable rate (cash rate 2.0%)||$2,865 – up $615|
* Based on the ABS average home loan balance, on a principal and interest loan over 30 years.