RBA’s cash rate call means homebuyers can breathe easy until February
There's little chance of home loan rates rising until 2022, but it will hit borrowers hard when it happens.
The Reserve Bank of Australia (RBA) has decided to hold the cash rate at 0.10% at its last meeting of 2021. 100% of the experts in Finder's cash rate survey predicted this decision.
With today being the last scheduled meeting of the RBA board until early February (the board takes January off), it is unlikely that interest rates will rise before then. While the bank can change the cash rate whenever it likes, in practice it rarely makes these decisions outside of these meetings.
The official cash rate determines lenders' costs of borrowing money they use to fund variable rate home loans. This directly affects the interest rates lenders set for home loans offered to Australian borrowers.
The RBA lowered the cash to 0.10% in November 2020 and hasn't moved it since. This has made home loan interest rates lower than they've ever been. This makes loan repayments cheaper for borrowers. But it has also boosted people's borrowing power and helped send property prices through the roof.
Interest rates really cannot get any lower. 46% of the experts in this month's cash rate survey now predict the RBA will raise rates in 2022. And even if the bank doesn't move, 71% expect lenders to raise rates anyway. Out-of-cycle rate rises are common. While the cash rate is an important yardstick for rates, lenders don't have to follow the RBA.
Higher rates will have a big effect on borrowers' monthly loan repayments. Let's examine a hypothetical scenario where the RBA lifts the cash rate to 1.25% by the later half of 2023 (this is the recent forecast by CBA head of Australian economics Gareth Aird).
Given that the current cash rate is 0.10%, if the cash rate moved to 1.25% that would add 1.15 (115 basis points) to a borrower's rate. If your home loan's rate today is a competitive 2.00%, it would therefore jump to 3.15%.
Let's say your loan amount was $600,000 over 30 years:
- Monthly repayments at 2.00% = $2,217
- Monthly repayments at 3.15% = $2,578
This rate rise would cost you $361 a month extra. That's $4,332 more a year in repayments. That's a pretty big jump in repayments. To prepare for rising rates, borrowers should make sure their current interest rate is competitive. That way you can minimise your costs now while rates are low. You can also build up a buffer of savings or put extra repayments into your loan (or your loan's offset account).