Successive interest rate increases, and not the value of each in isolation, could be the biggest issue for homeowners according to a leading financial commentator.
Canstar Group Executive Steve Mickenbecker, told news.com.au when the Reserve Bank of Australia lifts the cash rate, it usually leads to multiple increases.
“An increase of 0.15 or 0.25 per cent doesn’t add much (to a mortgage),” Mr Mickenbecker said.
“What people have to remember though is when the Reserve Bank moves (the cash rate) from the bottom, history shows there are usually six or eight increases within 18 months or two years.
“That puts a serious increase on your home loan repayment.”
Markets predict the RBA will increase the official cash rate to 2.5 per cent by 2023, while economists tip the rise won’t be that aggressive, increasing rates to 1.25 per cent in the same timeframe.
After previously suggesting rates would increase slowly, last week, RBA Governor Phillip Lowe told a business summit the Russia-Ukraine war could prompt interest rates rises ahead of what they previously predicted.
“The war in Ukraine and the sanctions against Russia have created a new supply shock that is pushing prices up, especially for commodities,” Dr Lowe said.
“This new supply shock will extend the period of inflation being above central banks’ targets.”
Dr Lowe said people had become accustomed to a low interest rate environment, making inflation difficult to manage.
“This runs the risk that the low-inflation psychology that has characterised many advanced economies over the past two decades starts to shift,” he said.
“If so, the higher inflation would be more persistent and broadbased, and require a larger monetary policy response.”
Mr Mickenbecker estimates that by the second half of 2023, the cash rate will hit 1.75 per cent, meaning the current average home loan rate of 2.95 per cent will increase to 4.72 per cent.
If the cash rate rose to 1.25 per cent, in line with many economists and the major banks, including CBA, a $1 million mortgage holder would be required to pay $633 more each month.
Mr Mickenbecker said it is worth looking at fixed rate home loans products to help property owners manage any rate rises in the coming years.
“Fixed rates were a lot lower than they are now, people think they’ve missed the boat,” he said.
“But it’s not too late. Take a bit of pain now and you’ll be ahead in the next 12 months.”
According to Canstar analysis, a $1 million principal and interest loan locked in the average three year fixed rate of 3.32 per cent, would mean monthly repayments of $4391, with total interest of $96,679.
While a variable loan would see the same borrower paying $4822 each month and total interest paid to $113,020 – $16,341 higher than if they had opted to fix their loan for three years.