Homeowners 'should brace for rate rise'

HOMEOWNERS should brace for a jump in mortgage repayments of up to $5000 a year, mortgage broker warns.

HOMEOWNERS should brace themselves for a jump in mortgage repayments of more $5000 a year over the next 18 months, a mortgage broker has warned.

While economists expect the Reserve Bank to leave the official cash rate unchanged at a 49-year low of 3 per cent at tomorrow's monthly board meeting, the central bank has warned it will need to raise the rate to "a more normal" level at some stage.

Loan Market Group executive director John Kolenda said homeowners could expect variable mortgage rates to rise by around 2 per cent over the next 18 months.

"Don't get accustomed to such low rates and get prepared for eventual rate increases," Mr Kolenda says.

"Even Reserve Bank Governor Glenn Stevens has warned consumers to allow for a 2 per cent increase in the future which would see variable rates at around 7.8 per cent.

This would still leave home lending rates slightly below historical medium levels of 8 to 8.5 per cent.

But a 200 basis point increase would add about $450 to monthly mortgage repayments, or some $5500 a year on an average home loan of $340,000.

Mr Kolenda said while the surge in rates wouldn't happen overnight, homeowners should be aware of the potential impact on budgets and lifestyle.

At the same time, home owners should be prepared for major lenders to raise their variable rates independently of any move by the RBA.

Mr Kolenda said a dramatic rise in property prices in markets around Sydney and Melbourne due to a shortage of stock would push the RBA towards increasing rates again.

He said people concerned about increasing interest rates were considering fixed rate loans, although major lenders started lifting rates on fixed rate products several months ago.

"Mortgage holders on variable rates should be trying to repay more than the minimum required on their loan while interest rates were low," Mr Kolenda said.

"That will prepare them for the inevitable future increases in interest rates."