Handling RBA rate talk: Are interest rate increases something to worry about?

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It’s easy to get caught up in the moment. A rise in the Reserve Bank’s official cash rate dominated industry news last week, with much of the chatter hinging on how this will impact variable interest home loans – and by extension, repayments

But while many Australians have good reason to be concerned about their mortgages, let’s keep things in perspective. Housing market fluctuations happen all the time, and the 25 basis point hike likely won’t be the last we’ll see this year. 

So while we may be in an uncertain moment, zooming out on the Australian property market will tell us how to handle the rate hike news – and plan for the future.

Loan details

Rate change

Repayment change if rates go up

Our current housing market moment

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Honing in on a specific week in the housing market is like mistaking a single puzzle piece for the bigger picture. After all, a cash rate hike on 3 May will cause ripples throughout the entire economy in 2022.

These effects can include:

  • Higher variable interest rates for home loans, savings accounts, and term deposits.
  • Costlier home loan repayments, especially for variable home loans.
  • Higher insurance premiums on mortgage protection policies.
  • Lower property prices, since expensive home loans put off many potential buyers.
  • Diminished home equity, which often follows property value drops.
  • Constrained housing affordability, since higher interest loans price many Australians out of home-ownership while putting others under mortgage stress.
  • A rising cost of living, since housing costs contribute significantly to the Consumer Price Index (CPI).

We may already be seeing some of the short-term fallout of the rate rise. In response to the RBA decision, many banks have announced 0.25% increases to variable home loans, including the Big Four (CommBank, Westpac, ANZ, and NAB).

Variable rate home loan trends in Australia:

Those hoping to avoid the variable rate hike by fixing their home loans may find themselves slightly disappointed – and behind the game. Anticipation over the RBA rate rise partially caused a fixed-rate hike scramble among Aussie banks throughout March and April. Now, almost all fixed home loans with rates under 2% p.a. have disappeared from Mozo’s database. 

Fixed rate home loan trends in Australia:

However, homebuyers who fixed their loans in March – even though variable rates were mostly cheaper then – may now find themselves spared from the RBA fallout. Cheapest now doesn’t mean cheapest always, so fortune favours those who think big picture. 

Expensive home loans can put people under mortgage stress, which will spill over into grim consumer sentiment for the housing market in general. It’s difficult to gauge whether our current climate means the property bubble has finally burst, or how much diminishing dwelling values will offset the colossal 2021 boom

But for now, ballooning inflation and pricier home loans may yet spell an imminent housing downturn (or at the very least, a slowdown).

RELATED: It just got harder to service a home loan: here's what you can do

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Downturns are nothing new to the property market. Besides, there’s much more to consider besides rising interest rates when reading the housing crystal ball. If you look over the last thirty years of housing trends (the common life of a home loan), you’ll notice a few perspective-changing things. 

Firstly, housing prices will inevitably go up over time. Australian housing values have increased by nearly 415% since 1991, although they did experience their fastest rate of growth during the 2021 housing boom. So despite COVID, the GFC, and countless other global conflicts over that same time period, housing prices still escalated. For those looking ahead, this is critical to keep in mind.

Secondly, every boom is followed by a bust. Socioeconomic conditions create an ebb and flow in everything from property value to where popular demand lives. Higher demand will push up prices, then demand drops after the prices get too high, and so forth. 

It can be both a comfort and an inconvenience to know things will never stay the same, but this also encourages caution to those leaping into a red-hot market. Your equity may diminish when prices fall, or you may have to budget for a hefty capital gains tax. Even coastal erosion has jeopardised nearly $25 billion worth of beachfront property (big yikes for everyone who scrambled for a piece of that sweet seaside in 2021).

Thirdly, the cost of housing finance greatly impacts the property market, especially as a result of the cash rate. Raising the cash rate escalates interest rates for a slew of financial products, namely home loans and savings accounts, which become either costlier or more lucrative depending on your perspective. Higher interest rates therefore encourage consumers to save rather than spend, thus halting inflation.

The RBA made their latest decision because headline inflation spiked at 5.1% last quarter, indicating a dire need to pump the brakes on the runaway economy and end the record-low 0.1% economic stimulus. By normalising monetary conditions back to pre-pandemic levels, the RBA hopes to calm down the feverish economy.

(For context, the 1991 cash rate was a whopping 12% due to high inflation. By comparison, today’s 0.35% cash rate doesn’t seem so scary!)

While it’s part of the deal that you may save now to pay more later with a variable home loan, it’s important to stress test your mortgage because rates will always change. Budgeting for inevitable shifts instead of panicking about what’s happening now will put you in better stead with your mortgage repayments long-term, and may be key to breaking – and staying – in.

RELATED: Home-owner budgeting: How to balance out rising home loans by switching your home insurance policy

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Keep a finger on the housing market’s pulse with our home loan interest rate comparison tool, or stay on top of rate increase news with our RBA rate tracker

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Compare low interest home loans - last updated 5 July 2022

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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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