With the Reserve Bank surprising the majority of economists by keeping the official cash rate on hold at their recent October meeting, many are now wondering what lies ahead for interest rates; when can we expect the next seemingly inevitable rate rise and more importantly, how high will interest rates climb?
A recent article from journalist Carolyn Boyd published on Domain, says that the RBA’s Glenn Stevens is sounding interest rate alarm bells, warning they will inevitably rise in order to keep the steam rolling economy in check; which is being powered by the “biggest resources boom since the late 19th Century.”While Stevens acknowledges that some sectors of the economy are currently feeling the pinch from the growing Aussie dollar, such as tourism based industries, he says interest rates are “a blunt instrument when it comes to keeping the economy in check” but they are the only stick the RBA can wield.
So with rate rises on the horizon, what does it mean for the average Australian mortgage holder? Well if the official cash rate increases as some economists are forecasting, at 0.25% by the end of this year, and your bank passed the increase on in full (meaning the retail rate rose from say 7% to 7.25%), repayments on your 30 year, $373,000 loan would jump from $2482 per month to $2545 per month.
Of course some experts are predicting we’ll see five rate rises by the end of next year, which would mean the monthly repayments on that same average mortgage could reach $2802 – $320 more than you currently pay.
Then there’s the question of whether the banks will increase their own rates independent of the Reserve Bank. The Domain article illustrates what the average mortgage holder could be paying out of their income, given various interest rate scenarios and making certain assumptions about wages and house price growth, as follows;
|Proportion of income by
meet loan repayments
Of course with these potential interest rate outcomes in mind, some home owners and investors are starting to wonder whether a fixed rate mortgage is now the way to go.
While the parity of fixed rates to variable was a tempting prospect a couple of months ago, fixed rates have started to rise again; meaning if you were to refinance now, you might well have missed the boat.
According to the Domain article; “Australia’s largest independently owned mortgage broker, Mortgage Choice, says in the past fortnight, three lenders on its panel increased rates on one or more of their fixed rate products. The company’s weekly interest rate averages for its panel of 24 residential lenders showed a rise in the three-year fixed rate, albeit a small one, to 7.37 per cent from 7.33 per cent. Three years is the most popular fixed term.”
At the same time, the average one year fixed rate jumped from 7.02% to 7.03%, while the five year fixed rate held steady at 7.81%. Spokeswoman for Mortgage Choice Kristy Sheppard says this is in comparison to a standard variable mortgage of 7.36% or a basic variable mortgage of 7.07%.
Sheppard says there are pros and cons to both options, but ultimately it’s about the individual financial needs of borrowers now and in the future, with some mortgage holders hedging their bets and splitting their loan between a variable and fixed rate.
Of course the best way to cover yourself is to ensure you are not so heavily geared that you couldn’t cope with another five rate rises over the coming year and importantly, start building that all important cash buffer as the optimum insurance against increasing repayments.
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