The affect that any
interest rate rises will have on borrowers with
home loans depends on a number of factors including whether their loan is fixed or variable, the balance owing on the loan, how much their financial institution increases their interest rates by and for how long.
When interest rates rise, borrowers with
variable rate home loans are the most affected as this means that their repayments may increase as a result. If they haven't factored the possibility of any interest rate rises into their budget, when they worked out how much they could afford in repayments, then they may feel the pinch financially which is usually called 'mortgage stress'.
To determine if rates will rise or not, on the first Tuesday of every month (except for January) the Reserve Bank of Australia (RBA) meets to determine the official cash rate, which is then announced to the public. They will announce one of three things:
- If the cash rate will rise;
- If the cash rate will remain the same; or
- If the cash rate will decrease.
There are a number of factors that affect the cash rate including housing, employment and inflation. Depending on the status of the economy and which factors have seen growth or a decline will depend on what happens to the cash rate. For instance, when the global financial crisis occurred in mid 2008 the cash rate increased and the average fixed and variable mortgage interest rates increased as a result. Then towards the end of 2008 the cash rate decreased and as a result the average interest rates for home loans declined.
In order for borrowers to protect themselves from interest rate rises some choose to fix their interest rates, especially when the rates are low as this means that they can lock in a lower rate for a fixed term, usually up to five years. The major benefit of fixing your mortgage is that if interest rates rise higher than what they fixed with, they won't be affected while they are fixed. At the end of the fixed term the interest rate then reverts to the standard variable interest rate.
If you have a mortgage or are in the market for one,
compare home loans online and see if you can find one that offers a low rate to save you more. Or refer to the table below for a list of some variable rate home loans currently available.
RateCity
