How high will interest rates go in 2022?
Reserve Bank of Australia (RBA) Governor Philip Lowe gave an interest rate forecast, predicting what could happen for the cash rate, and for those with a home loan, it looks like there could still be months of rate hikes ahead.
Whenever the RBA raises the official cash rate, Australian banks and other lenders are usually quick to follow, raising the interest rates they charge variable rate home loan borrowers. So far this year, the RBA has raised the cash rate three times, and each time banks and lenders have followed suit, most recently after July’s cash rate hike.
Fearing that the average variable rate mortgage could become even more expensive in the coming months, Dr Lowe enjoyed an appearance on the ABC 7:30 a.m. program to offer its own forecast of the possible rise in the key rate, as the central bank continues its efforts to bring inflation back in line with its target of 2 to 3%.
How high will interest rates go?
Based on the latest RBA forecast, the cash rate in Australia is expected to peak at 2.5%, with inflation likely to reach 7% by the end of 2022 and not expected to decline until early 2023 .
Talk with 7:30 a.m. in June this year, Dr Lowe said Australians ‘must be prepared for higher interest rates‘.
“We had emergency settings during the pandemic, it was the right thing to do, but the emergency is over, and it’s time to remove the emergency settings and move to more normal policy settings. monetary.”
These “emergency settings” came into effect when the RBA set the cash rate at an all-time high of 0.10% in November 2020, to help mitigate the economic effects of the COVID-19 pandemic. It was originally expected to rise again in 2023 or 2024, but the central bank decided to act earlier, in an effort to curb the surge in inflation.
“The other consideration is that inflation is high,” Governor Lowe continued.
“It’s too high. At the moment it is 5% and by the end of the year I expect inflation to reach 7%. That’s a very high number, and we need to be able to get back to 2-3% inflation. I am convinced that we can do it, but it will take time.
How would a cash rate increase to 2.5% affect your mortgage?
When the cash rate rises, banks and other lenders typically increase their variable interest rates on home loans by the same amount or thereabouts. If the cash rate were to climb to 2.5%, which is now predicted by the RBA, Canstar’s analysis shows Australians could see their mortgage payments become much more expensive each month.
What would this mean for the average variable rate mortgage? We crunched the numbers to see how much your monthly repayments could grow, relative to the size of your home loan. The table below assumes an average floating rate of 3.62%, as this was our database average as of July 5, 2022.
Our research assumes that if the cash rate rises to 2.5% and lenders pass on this rate hike in full, the average floating rate in Australia will be 5.27%.
This would mean that people with a $500,000 home loan could end up paying $488 more per month, while people with a $1,500,000 mortgage could face $1,465 in additional monthly repayments, per compared to early July.
|Mortgage amount||Monthly repayments: Average variable rate 3.62%||Monthly repayments: Average variable rate 5.27%||Difference|
Is it time to lock in a fixed rate?
With Dr. Lowe’s latest predictions in mind, you might be wondering if now is the time to lock in a fixed rate home loan when you can find a reasonably low rate. If you want to know more, we’ve weighed up some of the pros and cons of fixing your home loan, taking into account the potential benefits of it and some things to be wary of.
It should be borne in mind, however, that variable mortgage rates in Australia are still in many cases lower than fixed mortgage rates. For example, a Canstar snapshot of average Australian home loan rates on our database for the week ending July 4, 2022 found that the overall average variable rate home loan rate for homeowners was 3.62 %.
By comparison, the average one-year fixed rate was 4.38%, while the average two-, three-, four-, and five-year fixed rates were 4.98%, 5.38%, 5.78%, and 5.87%. The average floating rate should peak at 5.27% if the spot rate rises to 2.5%.
That said, the nature of variable rates means that it’s possible your lender will raise their rates by more or less than the RBA raises the cash rate.
Either way, if you’re looking for a low fixed or variable rate for a new home loan or refinance, you can compare home loans with Canstar to see if you can find a lender with an offer that meets your needs and to your situation.
Cover image source: Jo Panuwat D/Shutterstock.com
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