Home loan rates continue to surge. How can you prepare for the rate hikes to come?

Mother browsing home loans on laptop as young child looks on.

The RBA’s rush to normalise monetary policy has seen banks scrambling to revise their home loan rates, with some lenders pushing rates well above their pre-pandemic levels and past 7% p.a. 

The central bank’s war against inflation could translate to significant repayment pain for the nation’s borrowers, many of whom bought at the top of the property cycle and now face a double whammy of rising rates and dipping prices.

Economists now expect another bumper 50 basis point hike in July, which would leave the cash rate sitting at 1.35%

On a $500,000 mortgage taken out over 25 years at 3.57% p.a. (the current average variable rate among lenders we track), an increase of 50 basis points would add an extra $137 to one’s monthly repayments.

Meanwhile, a similar sized hike would see repayments jump up by $205 per month on a $750,000 mortgage and $273 per month on a $1 million mortgage.

According to Westpac economists, variable rate loans make up around 60% of Australian mortgages, meaning the majority of borrowers are currently vulnerable to a rate hike. What’s more, 75% of all fixed rate loans are set to expire by the end of 2023.

“Effectively 90% of mortgage borrowers are directly exposed to moves in the RBA cash rate over the next year and a half,” said Westpac chief economist Bill Evans.

Fixed rates no longer a refuge for borrowers

The RBA raised the cash rate by 50 basis points to 0.85% at its last meeting. It kicked off the tightening cycle a month earlier with a 25 basis point increase — the first rate hike it’s delivered in over ten years.

While variable rates have begun rising in line with the cash rate, activity on the fixed rate front has been ceaseless for months on end.

Among lenders we track, the average 1-year fixed rate has shot back up to 2019 levels. On 2 to 5-year terms, we would have to go back to 2015 to find comparable rates. 

At least two lenders in our database have been forced to lift their fixed rates beyond the 7% p.a. mark. However, this is likely due to an overreliance on funding from the US, where interest rates have risen at a much faster clip than in Australia.

Average fixed home loan rates

  

Savings buffers in place, but some bigger than others

In an address to the American Chamber of Commerce in Australia last week, RBA governor Philip Lowe acknowledged that the cash rate will continue to rise throughout the year as the central bank looks to rein in runaway inflation. 

A rapidly changing interest rate environment can be disheartening, but the fact that it was well-telegraphed means many borrowers have had plenty of time to prepare.

Indeed, a recent survey by Mozo found that almost a third (29%) of borrowers have been setting aside extra money and making an effort to build up a savings buffer over the past year. 

A further 24% of respondents have been putting spare change into their offset accounts, while 11% have been reining in their spending so that they can weather any upcoming rate rises.

Borrowers faced with higher loan costs also have the option of refinancing if it seems they are paying more on their loan than they need to be. At the time of writing, there are still nine lenders with headline variable rates below 2.50% p.a.

But Lowe has been careful to acknowledge that not all borrowers are on solid financial footing, and “while the medium borrowers have big financial buffers there are a group of borrowers that have very skinny buffers.”

For more information on 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.

Home loan comparisons on Mozo - last updated 13 August 2022

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    interest rate
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* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.

** Initial monthly repayment figures are estimates only, based on the advertised rate, loan amount and term entered. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.

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