What You Need To Know About The Pending Interest Rate Rise

The era of low interest rates looks to be coming to a startling end with rates predicted to rise faster than previously thought. There is growing speculation that the 0.1% cash rate that has held now for some time will be closer to 1% within a year. You need to pay attention.

Especially if you have a large mortgage. For an average buyer who recently purchased a home with the average mortgage of $500,000 and got a good deal of 2 per cent rate on a fixed term mortgage, the reversion to a variable rate loan amid rising interest rates could mean interest repayments will more than double.

So what’s going on? 

Current mortgages and interest rates 

With the RBA cash rate now sitting at a record low 0.1 per cent, there is simply no more room for the Reserve Bank to cut rates further without taking the cash rate to 0 per cent or below.

Since last raising interest rates almost 11 years ago, the RBA has cut interest rates time and time again in an attempt to achieve its inflation target of 2-3 per cent annually.

In the latest October monthly board meeting, the RBA left the official cash rate at a record low 0.1 per cent. The RBA governor, Philip Lowe is sticking to his long held view that the cash rate won't be lifted before 2024 which is when the RBA expects inflation to be sustainably within the two to three per cent target range.

Among its policy toolkit, the RBA will continue to target the April 2024 government bond yield at 0.1 per cent, while buying bonds at a rate of $4 billion a week until at least February 2022 with the aim of keeping market interest rates and borrowing costs low.

What’s been brewing

Back in February, global money markets started to price in an increase in interest rates. It was a bold move and set them on a collision course with the world's central banks.

The rate on benchmark 10-year Australian government debt suddenly shot up from 0.8 per cent to 1.6 per cent; doubling in the space of a few months.

The nation's biggest home lender is warning that interest rates will rise before the end of next year, joining two other major banks who are tipping the Reserve Bank to be forced to move earlier than it expects.

In late June, the Commonwealth Bank (CBA) moved up its forecast for the first RBA rate increase in more than a decade to November of next year. CBA is expecting a 0.15 per cent increase in November 2022, followed by a 0.25 per cent increase in December.

What’s happening now

Australia’s sovereign bond yields surged Thursday after the central bank chose not to defend its yield target, raising speculation that it could adjust its policy guidance as early as next week.

The rate on the April 2024 note more than doubled, jumping as much as 30 basis points to 0.51%. That took the gap to the RBA’s 0.1% target to the widest since yield control was introduced in March 2020.

Swap traders are signalling they expect the RBA cash rate to be 0.91% within a year, from 0.1% now.

Two weeks ago, CBA became the first major bank to increase their fixed rates followed by Westpac and ANZ last week. With NAB making a similar move this week, it’s only a matter of time before the other lenders follow suit.  

What lies ahead for mortgage holders

Increasingly, chances are that the timing on rate hikes will be much sooner than we have been led to believe.

If the RBA is forced to go down the same path of rising interest rates as RBNZ and a long list of other central banks, Aussie mortgage holders could be in for an unpleasant surprise.

With record numbers of households taking advantage of low interest rates and fixed term mortgages in the last few years, if rates were to rise as interest rate markets are expecting, things could get more challenging for these households in a couple of years’ time.

If 1.5 per cent worth of interest rate hikes was to be priced into the current average variable rate, the average interest rate on a variable rate mortgage would rise to 4.6 per cent per annum.

With world record levels of household debt, Australia simply can't afford a dramatic jump in interest rates, particularly if wages growth remains stagnant.

Unless you recently refinanced or took out a loan, this would be a good time to have it reviewed to ensure you get the most competitive rate or even lock in a low fixed rate now as most banks are starting to increase their rates even though RBA is only projecting a rate increase in 2024. 

Give Darren a call on 0452 339 778 or email him at [email protected] to discuss what options you have available.