It seems the era of record-low interest rates may soon be over, as Commonwealth Bank Economists predict that the Reserve Bank of Australia may lift the cash rate as early as 2022.
The cash rate has been left on hold at 0.10 per cent since November last year, with the last cash rate increase now over a decade ago. Reserve Bank of Australia (RBA) Governor, Philip Lowe, suggested that we may not see a cash rate increase until 2024, when inflation targets may be met and term funding ends.
But this may change soon, as CBA’s Head of Australian Economics, Gareth Aird, said their forecasts had been contradicting the 2024 deadline for the last six months.
“Our message has been consistent and unswerving: the labour market will tighten quickly, and this means that wages and inflation will lift, particularly because the supply of labour is constrained,” said Mr Aird.
Their forecasts pointed to an RBA rate hike of 15 basis points in November 2022.
In a sign of what may be to come, CBA hiked their serviceability floor only last week from 5.10 per cent to 5.25 per cent – the highest rate of all the big four banks.
When a lender tests your home loan eligibility, they ensure borrowers can afford to repay the loan at 2.5 per cent higher than its current ongoing interest rate, or its internal serviceability floor, whichever is higher.
RateCity’s head of research, Sally Tindall, said: “The RBA isn’t going to hike rates without plenty of warning. It has gotten into the habit of giving us plenty of notice.”
“When the time comes, the RBA will lift the cash rate with a slow and steady hand.”
But for those households that have bought at the peak of the market and are now potentially facing rate increases on gigantic mortgages, there’s still time to get prepared.
“The RBA will want to see sustained growth in wages before committing to multiple rate hikes,” Ms Tindall said.
“If it doesn’t, some families could default on their loan and that’s the last thing anyone wants to happen. People can soften the blow of future rate hikes by getting ahead on their home loan now.
“While a lot of mortgage-holders are on a fixed rate at the moment, which typically have caps on extra repayments, they still chip in some extra money and every dollar counts," she said.
RateCity tips for interest rate increases
Much like death and taxes, rate fluctuations are to be expected over a 25–30-year mortgage. Currently, there is an entire generation of new buyers who’ve never lived through a rate hike.
Whether the cash rate is lifted in 2022 or 2024, it may be worth looking at your budget and taking stock of the following tips to protect yourself from mortgage stress.
- Consider making extra repayments. If your home loan allows you to make extra repayments, and you can budget for this additional payment, it may be worth considering. Chipping away at your home loan’s principal is one option for households to reduce their ongoing mortgage repayments and overall interest charges.
- Take advantage of your offset account. Another option to reduce your principal and keep interest repayments down is to consider taking advantage of your offset account. Any funds you deposit into this account ‘offset’ the principal of your mortgage, meaning your repayments are reduced. For example, on a $500,000 mortgage with $30,000 in the offset account, the repayments will be as if you have a $470,000 mortgage.
- Ask your bank for a rate cut. Lenders typically reserve their more competitive interest rates for new customers to get them on the books. If you’ve been a loyal customer for some time now and you’ve paid down some equity into the loan, hop online and see what rates new customers are being offered. You’d be surprised what a lender is willing to do to keep you happy if you simply ask for it.
- Consider refinancing. If you’re still unsatisfied with what your home loan lender is charging you, another option to consider is refinancing. By switching your mortgage to a lower rate lender, you’ll reduce your mortgage repayments and the amount of interest being charged. Plus, some lenders are offering refinancers competitive cashback offers to make the effort of refinancing a little easier. Just be sure to do your research around the time and cost to refinance before committing to this financial decision.