The impact of rising interest rates.

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The information in this article was current as at April 6th 2022.

Get ready for it! For the first time in over 10 years, the Reserve Bank of Australia (RBA) has flagged that given the current and predicted economic conditions interest rates will rise. Along with increasing property prices, reduced incomes, and uncertainty due to the pandemic, this is another challenge facing young Australians, and the older ones too, when it comes to owning their own home.

So, how will interest rate increases impact Aussies?

Let's start with those looking to buy a home. An interest rate rise means higher repayments and there's an expectation that rates will continue to rise for a period of time. The table below shows how this would increase repayments above the current level.

Interest rate

Monthly repayment

Annual increase

Current rate 3.29% pa

$2,188

 

Increase 0.25% pa to 3.54% pa

$2,257 (+$69)

$828

Increase 1.0% pa to 4.29% pa

$2,472 (+$284)

$3,408

Increase 1.5% pa to 4.79% pa

$2,621 (+$433)

$5,196

  • 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.

While ta small increase 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 1.5%, would take their home loan repayments from $2,275 per month to $2,726. That extra ~$500 per month would put some serious pressure on their budget; especially in light of the fact that 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 $2,300 mark, at an interest rate of 4.79%, their loan amount would need to reduce to approximately $440,000 - meaning they need to save another $80,000 for their $650,000 home. Alternatively, they may decide to purchase a home for the reduced amount of $570,000; 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 impacted. Those with existing home loans, particularly if you've been enjoying fixed rates below 2%, will need to prepare for higher repayments too. Many of the fixed rates that were available for below 2% 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, just as the anticipated rate increases are coming into play. 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 on there will be possible or helpful in your situation. But now, before rates start to rise, 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.

Those who are more likely to benefit from interest rate increases are those who have been disadvantaged during the low-rate period. People who rely on their savings and investments for an income. For them, rate increases, no matter how small, will be very welcome.

  • 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.


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Bronwyn Lawson

As a Financial Wellbeing Advocate with Westpac's Davidson Institute, Bronwyn Lawson draws on her diverse history in banking and finance. Since making the transition from banking to education 15 years ago, Bronwyn has delivered face to face workshops to business owners across the country, and helped people from all walks of life to enhance their financial knowledge. Bronwyn's most grateful for the time she spent in a number of Pacific Island nations helping educate and empower people, particularly women, to take control of their money and build better futures for themselves and their families.

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