How much could your mortgage payments cost if interest rates rise?

New figures from the Australian Bureau of Statistics (ABS) show a 3.5% jump in inflation over the past year. If rising inflation forces the hand of the Reserve Bank of Australia (RBA) to raise the national interest rate, what could that mean for the household budgets of Australian mortgage holders? ?

According to the ABS, the consumer price index (CPI) rose 1.3% in the December 2021 quarter and 3.5% annually. Trimmed average annual inflation rose to 2.6% from 2.1% in the September quarter.

Do not panic

In the past, the RBA board has said it has no intention of raising the cash rate until inflation is sustainably between 2 and 3% – a condition. that he previously predicted is not expected to take place until 2024, or later than 2023 at the earliest.

It remains to be seen whether this latest ABS data could affect the RBA’s best plans. While the increase in adjusted average inflation was described by the ABS as “the highest since 2014”, it is not yet clear whether the jump could be a temporary blow or the start of sustained and steady growth. of inflation that the RBA wants to see before it pulls the trigger to raise the cash rate.

How much could your home loan repayments increase if variable rates increased?

Whenever the RBA chooses to raise the national cash rate, banks and mortgage lenders will likely raise variable interest rates on home loans accordingly. This will likely increase the cost of home loan repayments, hitting the household budgets of many Australian property owners and investors.

As a hypothetical example, imagine a borrower recently took out a home loan of $595,568, the national average mortgage amount for homeowners in November 2021, according to the Australian Bureau of Statistics (ABS). . Assuming the borrower makes monthly repayments of principal and interest over 30 years and currently has a variable interest rate of 2.59% (the average for new loans in November 2021 according to the RBA), he would pay $2,381 per month.

Here’s how much more their loan could cost if the RBA raised the cash rate from the current record low of 0.10% to 0.25%:

Interest rate Monthly repayment Total interest Total cost
Original 2.59% $2381 $261,656 $857,224
0.15% increase 2.74% $2428 $278,584 $874,152

Source: MoneySmart. This hypothetical example does not take into account any charges or future changes in interest rates and is for demonstration purposes only.

Borrowers with fixed rate home loans can be spared these increases for a limited time. Their home loan repayments must remain constant until the end of their fixed rate term, after which their loan will revert to their lender’s variable rate. This could potentially lead to bill surprises and mortgage stress if variable rates were to rise significantly.

A prolonged period of rising rates could lead to significant increases in home loan repayment costs. Westpac economists recently projected the cash rate could reach 1.75 by March 2024, boosting home loan repayments to as much as $427 per month.

The next meeting of the RBA Board will take place on February 1, 2022.

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