Almost everyone has noticed that home loan interest rates are on the rise. An increase in interest rates can significantly impact your finances, so it’s important to know what a surge in interest rates means for you.
In this blog post, we’ll discuss how an increase in interest rates can affect you and how you can best prepare for any potential changes in your financial situation.
How Does an Interest Rate Rise Work?
When the central bank raises its interest rate, commercial banks will have to pay more for short-term loans. When this happens, lenders are less reluctant to lend at higher rates as costs can be passed on to their consumers.
What Does This Mean for Me?
An interest rate rise means higher costs to borrow money from banks. Home loan interest rates will be higher on mortgages in Australia making loads unaffordable. The intention of this is to help combat the rise in inflation by reducing spending to slow down the economy.
I’m Worried About How This Will Affect My Mortgage!
Wheninterest rates rise, your mortgage’s cost might skyrocket. The RBA raising the cash rate and the current pace of inflation implies that many of us will need to modify our household budgets to reflect the increases. It is critical to keep updated about rate changes and associated fees to make your mortgage payments without financial stress.
How Could This Affect My Monthly Repayments?
It’s important to remember that the higher interest rate will not only affect your current loan repayments, but any additional repayments you make will also be subject to the higher interest rate.
The table below is a hypothetical calculation of what an increase in interest rates would mean for your monthly repayments:
|
Loan amount |
Monthly repayment with a 4% p.a interest rate |
Additional monthly repayments based on percentage increase |
|||
|
0.25% |
0.50% |
1% |
2% |
||
|
$500,000 |
$2,639 |
$70 |
$140 |
$284 |
$583 |
|
$750,000 |
$3,959 |
$104 |
$210 |
$425 |
$873 |
|
$1,000,000 |
$5,278 |
$139 |
$280 |
$568 |
$1,165 |
What are My Options for Managing Rate Increases?
You should ensure you have a buffer for your budget to manage your cashflow with interest rate spikes. Locking your mortgage at current rates can also protect you from increasing rates. Another option is if you can refinance your mortgage and seek a cheaper rate, it can help minimize your monthly repayments.