How an interest rate rise could affect you

All signs point to the Reserve Bank of Australia lifting official interest rates in the coming months, meaning thousands of households will have to contend with their mortgage repayments increasing.

The last time interest rates went up was in November 2010, and since then the average home loan has ballooned in size.

On a $500,000 loan (OO, P&I) taken out over 25 years with an interest rate of 3.50% p.a., monthly repayments would go up by $68 under an increase of 0.25% and $136 under an increase of 0.50%. 

And if the cash rate rises to 2% over the coming tightening cycle, as many economists believe, those repayments could jump up an extra $538 each month, or $6,450 over the year.

To find out how much your repayments would increase under rate hikes of various sizes, try our rate change calculator below.

Westpac chief economist Bill Evans has said that Australians have built up a great deal of savings over the last two years, thanks to government income support and a pandemic-induced curb on spending.

“Much of this excess savings will be on the balance sheets of high income/low debt households. But it is also sitting with low-income/high debt households that will act as a potential buffer to higher rates,” he said.

“Banks report that borrowers are, on average, two years ahead on their mortgage repayments while there has been a $100 billion surge since Covid in balances in redraw facilities.”

Nonetheless, many households will still be tested by higher rates. Below, we’ve compiled a few things you can do to make sure your finances can withstand an eventual rate hike.

If your current home loan rate isn’t all that competitive to begin with, consider refinancing to a better deal. This might involve switching to a different home loan with the same lender or finding a different lender altogether.

Now might be a good time to switch to a home loan with a fixed interest rate. This would  protect you against any rate rises and ensure your repayments remain the same for a set period. Just keep in mind that fixed rate loans generally don’t come with flexible features like an offset account.

It’s always good to have a clear idea of how much money is coming and going each month, but that goes doubly so if an interest rate hike is around the corner. Start tracking your expenses and try to identify areas where you can cut back your spending.

If you’ve been able to build up a savings buffer, keeping it in an offset account can help you save by reducing the balance on which your lender charges interest. For example, if you owe $250,000 on your mortgage and have $50,000 sitting in your offset account, you would only be charged interest on $200,000.

For more information about mortgage and lending trends, head over to our home loan statistics page. And if you’re in the market for a home loan, visit our home loan comparison page, or browse the selection below.