Anyone with a home loan in Adelaide and across Australia has been keeping one very nervous eye on interest rates. So where is it heading?
The record low cash rate of 0.1% set by the Reserve Bank of Australia in November 2020 was designed to stimulate the economy on the other side of a pandemic lockdown.
It had the desired effect with buyers flooding property markets, driving housing prices to sky-high levels around the country.
But those days are gone.
Consecutive increases to July 2022 have seen the RBA’s cash rate hiked to 1.35% with more pain on the way.
But how much more is the big question?
How bad could interest rates get in Australia?
No-one has a crystal ball and can say with any certainty how high interest rates will climb and when they will reach their peak.
But the unanimous view of senior economists is that more rises are coming.
You can take that to the bank.
Anyone who borrowed vast sums of money at the peak of the property market when interest rates were rock bottom will be most challenged by the months ahead.
But further rises are inevitable. Westpac is expecting the cash rate to almost double to 2.6% by early 2023.
ANZ’s forecast is even bleaker, predicting four more consecutive rises of 50 basis points, taking the cash rate to 3.35% as early as November – its highest level in a decade.
The RBA weighs in on interest rates
RBA governor Philip Lowe said people “need to be prepared for higher interest rates” but has moved to downplay suggestions they could climb to as high as 4% by the end of 2022, saying it was not “particularly likely”.
“It would affect people’s mortgage payments, it would affect confidence and I think it would slow the economy quite a lot,” Lowe said.
“That would be the sharpest and quickest tightening of monetary policy that we’ve ever experienced in the inflation targeting regime.”
But ultimately, the cash rate will be guided by inflation which sits currently at around 5% and is tipped to reach 7% by the end of the year.
“That’s a very high number, and we need to be able to chart a course back to 2% to 3% inflation.”
In a foreboding sign from across the Tasman, inflation has already hit 7.3% in New Zealand, its highest level in 32 years.
The cost of rising interest rates
The cash rate is the amount of interest banks pay when processing transactions between each other.
It’s basically the wholesale or market interest rate.
But the standard variable rate paid by homeowners is much higher – usually between 2-4% higher depending on your loan to value ratio (LVR) and other factors you may be able to negotiate.
When the RBA lifts the cash rates, banks and financial institutions follow almost immediately.
If the ANZ is right and a rise of 2% materialises over the next four months, borrowers with an average $600,000 mortgage will need to find an extra $708 a month.
What a 2% interest rate rise will mean for borrowers
Your mortgage and extra monthly repayments:
$500,000 mortgage: $590 extra
Managing the situation
Interest rates rise in a bid to strangle rampant inflation by encouraging consumers to restrict their spending.
So stop spending!
You’ll need more money for those mortgage repayments so pull in those pursestrings and limit a lot of that discretionary spending.
That means less eating out, takeaway and expensive coffees, fewer nights out on the town, watch your fuel spend where possible and think about deferring that holiday.
But there are many more key planks you can put in place to soften the blow of rising interest rates.
Be vigilant with your debt, know how much money is coming in and going out and if you’re not sure, set up a budget with a spreadsheet so you can track every penny.
And ensure you are on the very best loan deal possible. The banks won’t do that for you.
If you haven’t done so yet, get some professional advice to ensure your long term wealth creation goals remain on track in spite of the challenging economic conditions.
Get advice today
Rising interest rates are spooking everyone but they don’t have to spin your property accumulation and investment goals wildly off course.
With rates freely tipped to rise dramatically before the end of the year, there is no better time than now to be equipped with the very best financial advice and home loan deal.
Calder Finance Broking are specialists in the business of home loans and refinancing in Adelaide and across South Australia.
The information contained in this article is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.
Taxation, legal and other matters referred to on this website are of a general nature only and are based on Calder Wealth Management’s interpretation of laws existing at the time and should not be relied upon in place of appropriate professional advice. Those laws may change from time to time.
Calder specialises in wealth management with a focus on advice, investment, sustainability, insurance and finance.
Written by Hayley Walsh from Calder Finance Broking, for more information please visit the Calder Finance website. Please note that Calder Finance Broking Pty Ltd is a Corporate Credit Representative of BLSSA Pty Ltd ABN 69 117 651 760 ACL 391237.