How a rate rise could affect you

Article by Rebeccah Elley

Westpac’s decision to lift its standard variable rate by 20 basis points has been making the headlines. Why has this big bank, who is already raking in billions of dollars profit each year, hiked up its variable rates? Well, the short answer is new regulatory rules by APRA, which require banks to increase their capital by 16% to at least 25% by July 2016.

While Westpac was the first to make the rate rise move, if the experts are right it won’t be long until the remaining big four - NAB, CommBank and ANZ - and other major home loan lenders follow suit and lift their home loan rates as well.

So how much would a rate rise lift your monthly repayments and the interest you pay over the life of your loan by? Let’s do the maths using the average variable rate of 4.67%...

Scenario 1 - $300,000 home loan over 25 years

Rate rise Interest rate Monthly repayments Interest paid over 25 years
Average variable interest rate 4.67% $1,697 $208,973
0.25% 4.92% $1,740 $221,945
0.50% 5.17% $1,784 $235,084
0.75% 5.42% $1,828 $248,387

Scenario 2 - $500,000 home loan over 25 years 

Rate rise Interest rate Monthly repayments Interest paid over 25 years
Average variable interest rate 4.67% $2,828 $348,288
0.25% 4.92% $2,900 $369,908
0.50% 5.17% $2,973 $391,806
0.75% 5.42% $3,047 $413,979

Scenario 3 - $700,000 home loan over 25 years

Rate rise Interest rate Monthly repayments Interest paid over 25 years
Average variable interest rate 4.67% $3,959 $487,604
0.25% 4.92% $4,060 $517,871
0.50% 5.17% $4,162 $548,528
0.75% 5.42% $4,265 $579,570

The tables above are a quick way of seeing the huge difference a rate rise of 0.25%, 0.50% and 0.75% could make to your ongoing repayments and the interest you pay over the life of the loan.

Just take the $700,000 loan scenario, if you were signed up with the average rate loan and your interest rate climbed by 0.75% you would be out of pocket by an extra $306 each month.

If you want a more exact indication of how a rate change could affect you, punch in your digits into our Home Loan Rate Change Calculator.

Switching to a better home loan deal

There are two options available to you if you are worried your lender will follow Westpac’s lead and lift its variables rates:

1. Hope for the best and if they do lift rates budget for higher repayments
2. Vote with your feet and refinance to a more competitive deal

Back to our $700,000 scenario, if you were thrifty and decided to choose the latter option of refinancing, and switched from the average rate of 4.67% to Click Loan’s The Online Home Loan (Principal & Interest, Owner Occupier) with a 3.91% variable interest rate, you would save $299 a month thanks to the lower repayments and $89,556 in interest over the life of the loan.

Now also might be a good time to consider locking in your interest rate by switching to a home loan with a fixed interest rate, as your repayments would remain the same over the fixed period and you would be protected against any rate rises. But keep in mind, fixed rate loans generally don’t come with flexible features like an offset account.

To compare some of the top home loan offers available in the market, you can visit our home loan comparison hub here.

Refinancing guides