Home Loan Interest Rate Rise
Aussies interested in buying a home are gearing up for higher interest rates. Indeed, interest rates have dominated the conversation about home loans, with issues like immediate refinancing to avoid higher rates and the looming mortgage stress that could affect many mortgage holders.
As borrowing from banks and boutique lenders is becoming pricier, it’s only right to understand why interest rates are increasing and what you can do to mitigate any financial problem relating to repayments.
What is an interest rate?
Any type of loan from a financial institution includes an interest rate. An interest rate is the cost of borrowing from a bank or a specialist lender, determined as a percentage of the principal amount you borrow from a lender. Banks charge interest as compensation for lending you the funds for a home loan, personal loan, business loan, and others. It’s usually expressed as a percentage per year.
How do banks calculate the interest rate?
The interest rate is typically calculated based on the annual percentage rate (APR) set by the Reserve Bank of Australia (RBA). The governing body is responsible for setting the cash rate, which then influences other interest rates in the economy and has a crucial role in managing inflation, economic stability, and the country’s growth.
Why is there an increase in interest rates?
When deciding the cash rate, the RBA board reviews economic data and indicators and considers current and predicted economic conditions domestically and globally. Higher interest rates are a way to combat inflation – to curb spending and slow down the economy.
What does this mean for home loans in Australia?
Prospective homeowners are always on the hunt for low-interest rates. After all, it typically follows that your debt size and cost of repayments will be less than if you were to have a high-interest rate.
But it’s not as simple as that. Interest rate is only one aspect of the home loan. What’s the ‘best’ option for one borrower may not be the best bet for you because you’ll have different needs and loan features than another borrower.
Moreover, the criteria used by lenders to gauge your eligibility could play a role on what interest rate can result in a successful home loan application. The more stable and trustworthy you are as a borrower, the more likely you can work to get a lower interest rate.
What happens to monthly repayments?
Australians with home loans are at around 33%, or 3.3 million households. The worrying trend, however, is that over 800,000 mortgage holders are at risk of “falling off the mortgage cliff” with repayments.
Lenders estimate that fixed-rate loans ending by 2023 would experience a median increase of approximately $650 per month.
Home loan costs aren’t just reliant on interest rate; the total cost will include LMI, ongoing fees, and other charges if you have additional features. Any increase in the RBA’s cash rate, together with inflation, means significant increase in monthly repayments. Many families might struggle with meeting these costs.
How can I manage higher home loan interest rates?
The ongoing interest rate hikes mean that many of us will need to adjust monthly expenses to accommodate these changes. The mortgage is a major expense for most families. Hence, it must be covered to avoid any defaults or other grave issues later on.
Talking to mortgage specialists could help you consider options. Some borrowers are eligible for refinancing (link). Major lenders like Westpac Banking Corp will consider refinancing for some borrowers who do not meet the eligibility standard. Other mortgage holders can lock in the mortgage at the current rate to prevent further increases.
Consult with our financial specialists if you’re worried about higher interest rates. Intellichoice can provide personalized guidance based on your mortgage specifics. We can help assess the situation, explore available options, and focus on practical solutions regarding your financial strategy.
