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Cash rate hike tipped for June: how will a rate increase impact your home loan repayments?

Cash rate hike tipped for June: how will a rate increase impact your home loan repayments?

Australia’s biggest bank has tipped that interest rates may rise as early as June 2022. And if this forecast is accurate, everyday Aussies may need to prepare to pay over $200 more a month in mortgage repayments.

Last week, Commonwealth Bank predicted that the cash rate may begin rising in June, ending 2022 at 1.00% and reaching 1.25% by February 2023.

The Reserve Bank of Australia (RBA) has kept the cash rate on hold at 0.10% since November 2020. Governor Philip Lowe has consistently stated that the RBA does not intend to lift rates until key inflation targets are met; originally predicted to be 2024.

Originally, CommBank had forecast the cash rate to rise in August this year and the cash rate to finish at 0.75% at the end of this year and not hit 1.25% until May 2023. However, CommBank now believes the inflation targets will be reached earlier than anticipated.

While not everyone agrees we can expect a cash rate hike as early as June 2022, it’s a friendly reminder to Australian homeowners to get their household budget in order before rate hikes inevitably come.

What impact will RBA rate hikes have on variable rate mortgage holders?

RateCity has crunched the numbers on CommBank’s predicted RBA rate rises to determine how much existing variable rate mortgage holders may be impacted by rate rises.

What interest rates are people paying?

  • 2.96% is the RBA average variable rate for existing customers
  • 1.77% is the lowest variable rate in the RateCity database
  • 2.24% is the average lowest variable rate from the big four banks for new customers

For a borrower with $500,000 owing on their mortgage with a rate of 2.96%, their monthly repayments could rise by $235 by the end of this year. By February 2023, the same borrower could be paying $302 more a month than they currently are.

$500,000 home loan – impact of rate hikes

Interest rateMonthly repaymentsDifference
Today

2.96%

$2,361

/
End 2022

3.86%

$2,596

$235

Feb-23

4.11%

$2,663

$302

Source: RateCity.com.au. Notes: based on an owner-occupier paying principal and interest on the average existing customer variable rate of 2.96% and 25-years remaining. Includes that principal would be paid off in this time. Loan size is based on amount owing in Feb 2022. Rate hikes are based on CBA forecasts published 15.02.22.

What impact will RBA rate rises have on how much people can borrow?

Rising interest rates will significantly decrease how much the bank will let people borrow. This is likely to apply a handbrake on property prices, as buyers who were planning to borrow at capacity will no longer be able to bid as high.

Based on CommBank’s predicted RBA rate rise forecast, RateCity research has discovered how much less people may be able to borrow.

If variable rates rise by 0.90% by the end of 2022 (cash rate hike to 1.00%), a single person earning $100,000 would be able to borrow an estimated $67,800 less. This assumes a 20% deposit.

Impact on a single person taking out a variable home loan (by end of 2022)

Single incomeCurrent borrowing capacity New max borrowing capacity if rates rise Difference

$100,000

$737,100

$669,300

-$67,800

See below for disclaimers.

If variable rates rise by 1.15 % by February 2023 (cash rate hike to 1.25%), a single person earning $100,000 would be able to borrow an estimated $84,900 less. This assumes a 20% deposit.

Impact on a single person taking out a variable home loan (by Feb 2023)

Single incomeCurrent borrowing capacity New max borrowing capacity if rates rise Difference

$100,000

$737,100

$652,200

-$84,900

Source: RateCity.com.au

Notes: Calculations are based on CBA’s serviceability calculator for a borrower taking out a 30-year owner-occupier loan paying principal and interest, with a 20% deposit on the RBA new customer rate of 2.56% applying CBA forecasted RBA rate hikes. Minimum household expenditure is applied, depending on income. Assumes APRA serviceability buffer stays at 3%. Note, borrowing capacity may vary depending on the bank.

RateCity’s tips to ahead of interest rate hikes

To help lessen the impact that a cash rate hike may have on your home loan repayments, it may be worth considering the following:

  • Make extra repayments now. If your home loan allows you to make additional repayments without penalty, doing so now may help you chip away at your principal and reduce the amount you need to repay.
  • Utilise your offset account. Money that you deposit in your offset account may help to reduce the amount of interest you pay on your mortgage. The current average balance in Aussie homeowner’s offset accounts is around $100,000 according to the latest ARPA figures, putting these borrowers almost four years ahead on their repayments.
  • Refinance to a lower rate. Another option worth considering is refinancing to a lower rate home loan to give yourself a rate cut. The interest rate charged on a home loan is one of the most significant factors impacting total cost and, as mentioned above, lenders are offering interest rates 72 basis points cheaper than what existing customers are paying.

Lower rate home loans

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This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.

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