While the cash rate remains at its record low, some lenders have already increased their rates.
Great news for homeowners, with the Reserve Bank of Australia maintaining the record low cash rate of 0.1 per cent at its final board meeting of the year. The RBA Governor, Philip Lowe said the Australian economy continues to recover well from initial setbacks caused by the Delta variant and expects growth to return to the economy in the first half of 2022.
“The emergence of the Omicron strain is a new source of uncertainty, but it is not expected to derail the recovery,” said Mr Lowe in his statement on Tuesday.
He said that all indicators are pointing to a strong economic recovery in the market, with job’s being advertised at record high’s and many businesses finding it extremely difficult to fill vacant positions.
Mr Lowe reiterated that the RBA will not increase the cash rate until actual inflation is sustainably within the two to three per cent target range. While inflation has increased, it is not expected to reach 2.5 per cent until 2023.
Based on the record low cash rate and comparative record low interest rates offered by most lenders, it’s unlikely we will see any further decreases to the interest rates offered by lenders. In fact, most of the big banks have now increased their fixed and variable interest rates despite the fact that the RBA has maintained the cash rate at 0.1 per cent. Why you ask? While lenders are guided by the cash rate set by the RBA, they don’t have to follow it and therefore can decide to increase interest rates when they choose to.
Given interest rates are so low, with most lenders offering rates well under 3 per cent, homeowners will be feeling the impact once the cash rate is increased in the next few years.
Let’s assume the cash rate eventually increases to 1.25 per cent, lenders will invariably add the increased cash rate to the interest rate they offer. Basically, if you have a variable home loan rate of 2.5% at the moment, this would increase to 3.65% (Cash rate 0.10% increased to 1.25% = 1.15% increase).
Assuming the average home loan is $500,000 over 30 years your monthly repayments would increase by the following:
Current monthly repayment @ 2.5% = $1,975
Future monthly repayment @ 3.65% = $2,287
This relatively small increase would cost you an $312 per month, or $3,744 per year.
While this may be manageable for some, it’s based on a $500k loan. With so many buyers now borrowing amounts far beyond the $500k amount, these interest rate increases could have significant consequences to some homeowners.
To prepare for these certain increases, it’s essential that you start planning now and take advantage of these record low interest rates. There are a range of things you can do to plan for increases, including making additional repayments to your loan that will essentially create a buffer for you when rates increase. With this said, it's important to take a holistic view of your current situation to ensure your loan is working for you, including whether to have a variable or fixed home loan.
Our team at Smart Money Tribe are here to help answer any questions you have about your current or future financial needs. We work extremely hard to make sure our clients get the very best deals on the market. Ready to talk, get in touch today.
Comentarios