The impact of rising interest rates.
The information in this article was current as at February 10 2023.
In May 2022, in response to rising inflation, the Reserve Bank of Australia (RBA) started increasing their target cash interest rate and lenders quickly followed. This, along with other cost of living increases, is challenging many Aussie home-owners and intending home buyers.
So, what is the potential impact of interest rate increases?
Let's start with those looking to buy a home. Rising interest rates means higher repayments which impacts the affordability of a home loan. The table below shows the impact of recent rate rises and the potential impact of further rises.
Rates and repayments are based on Westpac's standard variable rate Rocket Repay Home Loan rate,
on a loan of $500,000 over 30 years,with the Premier Advantage package rate discount applied.
While the initial increase from November to January would likely be manageable for many, if rates continue to rise then it quickly becomes less affordable. For those looking at borrowing to buy a new property it would be a good move to revisit your budget and see how the increased repayments fit or may affect other things in your budget.
If things are looking tight then you may need to look for ways to reduce other costs, or even potentially reset your expectations on the price you can afford to pay for your new property or the amount of deposit you may need to save.
As an example, here’s one couple's story …
Lucy and Tim have been seriously saving for their home deposit for the last few years. With both of them earning reasonable salaries, they had been able to accumulate a deposit of $130,000 which they had expected would provide them with a 20% deposit on a $650,000 home. This would mean that their home loan would be $520,000. When they looked at their expected repayments, an interest rate increase of 1.0%pa, would take their home loan repayments from $3,182* per month to $3,527*. That extra ~$350 per month would put some serious pressure on their budget; especially since purchasing a home meant moving further away from their jobs which meant they also needed to buy a 2nd car. The increase in interest rates would also increase this cost.
To keep their monthly repayments at around the $3,200 mark, at an interest rate of 4.79%pa, their loan amount would need to reduce to approximately $470,000 - meaning they need to save another $50,000 for their $650,000 home. Alternatively, they may decide to buy a home for the reduced amount of $600,000; or do something in between and pay for Lenders' Mortgage Insurance costs. They could also explore whether their parents may be able to help by providing a guarantee.**
As you can see, the impact of rising interest rates isn't just about increasing repayments, there are other flow-on effects as well.
And it's not just new home buyers who will be affected. Those with existing home loans, particularly if you've been enjoying fixed rates below 2%pa, will need to prepare for higher repayments too. Many of the fixed rates that were available for below 2%pa were for periods of 1 to 2 years This means that many of these fixed rate loans will mature in the next 12 months or so. So, while new home buyers may have other actions they can take, existing homeowners don’t have as many options. The sooner homeowners start looking at how interest rate increases are going to affect their budget, the sooner they can make changes to minimise the impact.
Changes that may be helpful could be things such as:
- looking for ways to reduce other costs,
- repaying debt before the rates go up,
- refinancing to a lower rate loan,
- consider locking into a fixed rate loan,
- creating a repayment buffer to tide you over for a short while,
- accelerate repayments early to reduce debt and interest costs.
This list is not exhaustive and not everything will be possible or helpful in your situation. But now, is the time to be looking at your financial position and implementing any changes you may want to make.
Remember too, that rising rates won't just effect home loans. If you're considering any personal finance or credit cards, these rates are likely to rise too.
* All repayment amounts quoted are estimates.
**This is a fictional story based on the real-life experiences of many people.
This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness for the information to your own circumstances and, if necessary, seek appropriate professional advice. © Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian credit licence 233714.