Interest rate rises put us in a time warp – will madness take its toll?
It’s astounding … shifting interest rate rise expectations seem like a Rocky Horror Picture Show tune, so how could they affect you?
It feels like we’re in a weird time shift with home loan interest rates.
For a long time we heard the Reserve Bank of Australia saying it wouldn’t lift its official cash rate until 2024. Then it brought that back to late 2023. And now we hear some economists talking about rate rises coming before June. This year!
How the heck did that happen?
Borrowers might feel like they’re part of the Rocky Horror Picture Show, complete with sequins and jazz hands, singing “Let’s do the time warp again”.
The timing of rate rises is constantly shifting, as higher-than-expected inflation data forces the RBA to put its foot on the economic brake sooner. RBA governor Philip Lowe said this week an interest rate rise this year was possible, depending on inflation.
They’re definitely going up, and you have to go back in time a bit to see the cost impact of serious rate rises.
Many economists predict at least two RBA rate rises this year, up from today’s record-low 0.1 per cent. Others expect the official cash rate to reach 3 per cent quite quickly.
As for those scarier forecasts, to quote another icon of Aussie housing, The Castle’s Darryl Kerrigan: “Tell ‘em they’re dreamin’!”
Many households hit by home loan increases totalling 2.9 per cent would stop spending, slow the economy and bring cuts back on the radar.
Average mortgage sizes today are much bigger than they historically were, with the latest data showing new owner-occupier home loans range between $422,000 in SA to $769,000 in NSW. They’re $619,000 in Victoria, $514,000 in Queensland and $446,000 in Tasmania.
If we base calculations on a typical $500,000 mortgage, a RBA rate rise to 3 per cent in the next couple of years would increase monthly repayments from $2371 to $3191 – an $820 hit.
If we further step back in time (thanks Kylie!) to 2008’s RBA cash rate of 7.25 per cent, borrowers could be paying an extra $2243 a month on their mortgage.
Then there’s that dastardly 17.5 per cent cash rate from 1990, which would add more than $6000 a month to current home loan repayments.
Nobody expects rates to get anywhere near that, and whatever the size of rate rises ahead, many households will be able to ride them out.
About 45 per cent of borrowers are on fixed rates, so they will only suffer from sharp RBA rises when their fixed term ends, and on average households are almost four years ahead on their payments after using the pandemic and lockdowns to get ahead.
Recent borrowers who paid big bucks for houses will feel the most pain.
RateCity’s Sally Tindall says a couple of rate rises this year means some households will be forced to make budget cuts, but “a lot of families will be able to take it in their stride”.
“Now is a great time to prepare,” she says. “One, make sure you are on a competitive rate now – being on a variable rate gives you the ability to switch lenders.
“Two, make extra repayments. The lower a loan size is, when rate rises do hit there’s less pain you are likely to feel.”
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