Will interest rates go up in 2022?

Talk of rising interest rates has reached a fever pitch in recent months. While the exact timing is still uncertain, the market seems confident that we’ll see at least one rate hike before the year is through.

This comes as recent ABS data showed the total value of new home loan commitments hit a record high of $33.7 billion in January.

With Australians forced to take out bigger loans to get on the property ladder, a potential rate hike has many on high alert. We look at what the major players in banking are forecasting will happen, and what you can do to protect your finances.

When do the big banks think rates will go up?

The big banks have each weighed in on the likely timing of the next rate hike. Right now, CommBank is the most bullish in its predictions, having pencilled in a move for June 2022.

Major bank rate hike predictions

• ANZ: September 2022

• CommBank: June 2022

• NAB: August 2022

• Westpac: August 2022

The big banks have been backing up those predictions by making major changes to their fixed rate home loans, and plenty of lenders are following suit.

Fixed rates tend to act as a bellwether for where interest rates are heading. If they’re higher than variable rates, it generally means that banks expect the interest rate environment will go up in the future. Right now, fixed rates are rising at a rapid pace (more on that below).

What does the RBA say?

While a number of private sector economists have said a higher cash rate is just a few months away, the Reserve Bank of Australia has taken every available opportunity to tell us it’s in no rush.

At the same time, it admits that a 2022 move is "plausible."

The Bank has acknowledged that inflation is running ahead of its forecasts, but it’s still waiting for signs that it will remain sustainably within its target range of 2-3%.

But that’s not all it’s monitoring. RBA governor Philip Lowe has also made it clear that wages need to improve before the cash rate can be lifted. That all depends on how quickly unemployment can be driven below 4%.

The RBA will also be aware that lifting rates too rapidly could backfire and wind up hurting borrowers. Official interest rates haven’t gone up in more than 12 years, so for many Australians this will be the first time their repayments have increased since they took out their loan.

Home loan rates are already rising

Lenders don’t have to wait for the cash rate to go up to lift their mortgage rates. They can do so at any time if they believe an RBA rate hike is around the corner, or simply because the cost of doing business demands it.

That’s exactly what we’ve seen play out over the past year. 

When the pandemic hit, the RBA responded by injecting an unprecedented amount of liquidity into the banking system. This allowed lenders to take fixed rates to record lows and saw fixed mortgages explode in popularity.

As the economy improved and that emergency support was rolled back, lenders quickly reversed course. Before long, fixed rates were returning to their normal levels.

For a while, home loan rates under 2% p.a. were common across one to five-year terms. Nowadays, most have disappeared — and the few that are still around are only available on one to two-year terms.

The table below shows just how much the average fixed rate (OO, P&I) among lenders we track has changed over the past year.

Average fixed rates (OO, P&I) — Changes over 12 months

What about variable rates?

In stark contrast, variable home loan rates have been steadily decreasing for some time now. At the time of writing, the average variable rate (OO, P&I) sits at 3.05% p.a. — down 23 basis points in the last 12 months.

While that trend looks set to continue, it can all change at a moment’s notice when the RBA decides to raise the cash rate.

When that happens, lenders won’t hesitate to pass the extra costs onto their customers. So if you’ve been tempted by one of the many low variable rates out there, keep in mind that your monthly repayments could look a whole lot different in a few months’ time.

So should I fix my home loan?

That depends on what you want out of your home loan. While fixed rates might be the more expensive of the two at the moment, variable rates could rise sharply once the RBA begins its tightening cycle.

Economists at Westpac are betting the cash rate will be sitting at 1.75% by March 2024. Assuming variable rates rise at the same pace, that means the average variable rate could be as high as 4.70% p.a. in two years’ time.

And by then, the fixed rates available to new customers will be even higher.

So if your main priority is securing a low rate, it might be worth narrowing your search to the fixed rate loans currently available and giving variable rates a miss. 

If you can’t decide between the two, you can opt for a split loan. This involves asking your lender to divide your home loan into two accounts, one with a variable rate and the other with a fixed rate.

This can be a good way to hedge against future rate hikes, while ensuring you don’t miss out on many of the features that typically come with variable rate home loans, like the ability to make unlimited extra repayments and access an offset account.

To work out how much you could be paying if rates go up, use our home loan repayments calculator. And for more information on property and lending trends, browse our home loan statistics page.