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It’s been more than a decade since the last interest rate rise but millions of property owners are now staring down the barrel of years of rising home loan interest rates (and consequently steeper repayments) as the Reserve Bank prepares to bring an end to the era of ultra-low rates.

While it’s impossible to know exactly how high rates will eventually rise, RBA governor Philip Lowe said it’s “plausible” that interest rates will begin rising this year.

Analysis by Your Investment Property shows Australians with a $500,000 home loan could shell out hundreds extra per month in repayments, depending on how high the cash rate is increased.










 

Interest rate

Monthly repayment

Difference

Average variable investor rate

3.09%

$2,132

Plus 0.25 pps

3.34%

$2,200

$68

Plus 0.50 pps

3.59%

$2,270

$138

Plus 0.75 pps

3.84%

$2,341

$209

Plus 1.00 pps

4.09%

$2,413

$281

Plus 1.25 pps

4.34%

$2,486

$354

Plus 1.50 pps

4.84%

$2,635

$503

Plus 1.75 pps

5.59%

$2,867

$735

The analysis assumes a $500,000 mortgage over a 30-year loan term with monthly principal and interest (P&I) repayments.

Many economists believe interest rates could start increasing as early as May this year, after Australia’s Consumer Price Index (CPI) rose 5.1% over the twelve months to the March 2022 quarter.

Economists predict the cash rate could go as high as 1.75% in 2024. It currently stands at a record low of 0.10%.

To make matters worse, newer investors who have only purchased within the last ten years haven’t experienced a rate rise before, paving the way for a debt cliff as owners struggle to manage mammoth home loans as a result of the property boom.

If you’re worried about how you will manage your mortgage repayments when interest rates rise, you can take steps now to start preparing.

Make extra repayments now

If your home loan interest rates are on the lower side, try making extra repayments into your mortgage before rates begin rising. You could do this by adding a little extra into your monthly repayments, making more frequent repayments, or depositing a lump sum like your tax refund.

You may want to check that your lender hasn’t placed any restrictions on making more frequent or extra repayments, especially if you have a fixed loan.

Build a buffer in your offset account

Dr Lowe advised borrowers to “make sure you have buffers” when asked what advice he would give to borrowers preparing for interest rate hikes. One way you could do this is by making extra payments into your mortgage offset account if you have one.

That money is then ‘offset’ against the balance of your home loan, so you only pay interest on the difference between the loan amount and the amount in your offset sub-account. This means you pay off the loan faster and with less interest.

Consider refinancing your loan

If your current lender’s interest rates are on the high side, it could be worth picking up the phone and asking them for a better deal, particularly if you have benefitted from the recent house price boom and now have a decent chunk of equity built up. Your bargaining power could be significantly stronger, especially if you have been diligent with making repayments on time.

If your current lender isn’t willing to budge, it may be time to switch to another lender with a more competitive rate. We have some of the lowest rates on investor loans in the market, starting from just 1.99% p.a. (2.71% p.a. comparison rate) on our Smart Booster Investor Bundle, which allows you to bundle your investment loan with your home loan on your owner-occupied property. With both owner-occupied and investment loans starting with a 1, and no monthly or ongoing fees, you could save thousands.

Find out if you qualify today.

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Marie Mortimer is Managing Director of loans.com.au, one of Australia’s largest online lenders. Since Marie started the business in 2011, Marie has grown loans.com.au into a company with $6 billion worth of home and car loans. Marie is dedicated to improving financial literacy for all Australians and is passionate about the FinTech industry in Australia. When she isn’t at work, she loves to spend time with her husband and two young children.

loans.com.au is an online lender for home and car loans. Since 2011, Aussies have trusted our locally based loans.com.au team to support them with low home loan and car loan rates, approved quickly through the online loans.com.au app.


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