Cash rate rise puts pressure on homeowners

WITH LOAN MARKET GEELONG

The recent increase to 0.35 per cent in the Reserve Bank’s target cash rate has changed the mood of many homeowners who have a variable interest rate with their lenders.

Economists at the major banks forecast incremental rises of 0.25 per cent in the cash rate over the next 18 to 24 months.

ANZ Bank is the most pessimistic, predicting the cash rate will exceed 3 per cent before the end of next year. Westpac believes it will hit 2 per cent within 12 months and NAB puts its money on a 2.5 per cent rate by August next year.

But how does this impact homeowners?

Lenders use the Reserve Bank’s target cash rate as a reference for the interest they charge borrowers.

Any future rise in the target cash rate will almost certainly force up variable interest rates, although it is up to the independent lenders to decide to pass on the increase.

As a guide, it’s worth examining the impact of rate rises on the average-sized home loan of $611,524, as calculated by the Australian Bureau of Statistics.

Say your variable interest rate was 3 per cent p.a. for a 25-year loan before the Reserve Bank moved, and your lender increased its interest rates in line with the cash rate increase, your typical monthly repayment of principal and interest could have increased by $80 to $2,980.

If, as NAB predicts, the cash rate rises to 2.5 per cent, and the lender increases its interest rates in line with the cash rate, then the loan’s interest rate will increase to 5.4 per cent p.a., increasing repayments by $819 to $3,719.

Rising interest rates are always a double-edged sword.

They can favour those who are saving to buy a home because the interest on savings also increases, though on the other end the higher repayments can raise the serviceability requirements, changing borrowing capacity.

Whether you already have a home loan, or are looking to get into the market, come speak with our team

We can help breakdown your individual circumstances and identify if you could be on a more competitive rate or show you how much your repayments could be for a new loan.

Loan Market Pty Ltd | Australian Credit Licence 390222

Speak to the Loan Market Geelong team for a breakdown of your individual circumstances and to identify if you could be on a more competitive rate or show you how much your repayments could be for a new loan.