Will Rising Home Loan Rates Impact me?

Following many consecutive months of low interest and home loan rates, Australian banks have finally started to increase the costs of borrowing for mortgages for periods of two to five years. It has been at the forefront of Australian media for the last 12 months, and it has finally occurred. Many Aussies have rushed to lock in their low-interest rates in preparation for the prediction that the Central Bank will raise the cash rate earlier than 2024. The following article will outline what this means and how it may impact you.

What is driving the interest rate increases?

There are a range of factors that are putting upward pressure on interest rates including increases in funding costs as Global Central Banks begin to allow for interest rates to rise as a response to the economic damage caused by the COVID-19 pandemic. This was made evident in October 2021 when ANZ, Commonwealth Bank and Westpac increased the fixed rate for mortgages of owner-occupiers by 0.35%. Rate City, which tracks bank rates has suggested that 19 lenders increased their three-year fixed-rate mortgage rates, with 24 lenders cutting rates on variable mortgages. This can be predominantly attributed to banks anticipating that the cost of lending will increase despite the cash rate not being predicted to increase until 2024.

In conjunction with this, there is a range of other reasons which have led to an increase in banks increasing the cost of borrowing including, an expected and sustained rise in inflation in the Australian economy above what was previously predicted. The result of this has seen bond prices falling both in Australia and across the globe. To read more about how rising bond prices may impact the price of shares, click here.

In addition to this, the Reserve Bank has ceased its emergency COVID funding for lenders which has allowed for interest rates to increase up to the market rate. The RBA is also no longer engaging in Quantitative Easing which refers to when the RBA buys back bonds and keeps the interest rates on bonds lower than if they were not involved in these transactions in the market. When bond yields increase, the funding costs for banks also rise which is then passed on and borne by consumers.

Will this place a strain on my finances?

A rise in interest rates is likely to impact both those trying to obtain finance as well as existing mortgages in place and the repayments required. Low-interest rates over the last 10 years have seen an exponential rise in Australia’s house prices, which rose another 1.5% in October 2021, which meant that prices have increased by 21.6% since this time last year. This has outpaced wages by a ratio of approximately 12:1 and is one of the main reasons why first-home buyers are being locked out of the Australian housing market. Increasing interest rates, although in theory may flatten increasing house prices, is likely to make borrowing more difficult.

Despite the RBA saying that interest rates will not be raised until 2024, rising inflation and bond rates may mean that this date may be brought forward. Banks have prepared for this by raising their interest rates now so that interest rates are not fixed at the current rate of 0.1% when they do eventually rise. This may impact borrowers who have become accustomed to low-interest rates which have made it easier to borrow. Therefore, it may impact individuals and families who were only able to borrow at lower rates, as they may no longer be able to afford the increased mortgage repayments associated with their loan.

For example, if a family required a $500,000 home loan borrowed at 2% over a 30-year period, the lifetime interest repayments would be $165,000. However, if this was borrowed at 3% the repayments would rise to $260,000.

This may require these individuals to reconsider their budgeting and financial requirements in order to meet these repayments or could bar them from potentially borrowing altogether. If you would like additional information on the differences between investing in property or shares, click here. If you would like to discuss your current financial or investment strategy with an adviser, please click the link to organise a complimentary 20-minute phone call with an EPG Wealth adviser.


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The material contained in this is based on information received in good faith from third party sources, and on our understanding of legislation and Government press releases at the date of publication, which are believed to be reliable and accurate.
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