Home loans to get more costly as RBA flags rate rise

Homebuyers who have taken out mortgages at record low interest rates have been warned that they might not be around for much longer, as a rapidly improving economy prompts a rethink of the Reserve Bank’s loose monetary policy.

Speaking to the Australian Business Economists on Tuesday, RBA governor Philip Lowe said he would like to see the cash rate - which has remained at 0.10% for the past year - sitting at 2.5%, if not higher.

"We are trying to get interests up over time," he said.

"We are in no hurry, we're patient, but if we are successful interest rates will go up. People borrowing today need to remember that."

Lowe's comments were a reminder that low interest rates are typically a response to lacklustre growth and slow progress towards inflation targets, and are unlikely to remain in place as those targets are met.

A "neutral rate" of 2.5%, or even 3.5%, would signal a return to stronger economic conditions, but Mozo’s banking expert Peter Marshall said such a steep increase is unlikely to be appreciated by mortgage holders.

"Everyone’s going to see rates going up and get a bit of a wake up call that this almost free money era that we’ve been in for 18 months is over," he said.

"People need to make sure that they can meet their repayments at high interest rates, and in five years’ time they could be significantly higher than they are now."

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Right now, the average variable rate among lenders we track sits at 3.09% p.a., putting the average repayment amount on a $500,000 mortgage (over 25 years) at $2,395 per month.

If the cash rate rose to 2.5%, those repayments would increase by $672 per month, totalling an extra $8,064 paid over the year.

While Lowe now admits that the first interest rate hike could occur before 2024, he said the chances of a move next year are remote. 

"I can’t rule that out because it doesn’t have zero probability, but it has a very low probability because it would require wages growth to pick up very substantially and probably above 3%," he said.

Despite the recent inflationary spike, the RBA is also waiting for underlying inflation to reach the middle of its 2-3% target band, which it expects will occur by the end of 2023. 

"If this comes to pass, it would be the first time in nearly seven years that we will be at the mid-point," Lowe said.

"It is also possible that progress will be slower than expected, which would result in the cash rate staying at current levels for longer."

For more information about interest rates 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.