The RBA is preparing to lift the cash rate for the first time in more than a decade — here is what that means for your home loan.
The RBA interest rate forecast for 2022 has become one of the most closely watched topics in Australian finance. After holding the cash rate at a record low of 0.1% since late 2020, the Reserve Bank of Australia is signalling that a rate rise is firmly on the cards. If you have a variable-rate home loan in Australia, this shift will directly affect your repayments. Here is what the forecasts say and what you can do to prepare.
Why rates are rising
When COVID-19 arrived in Australia in 2020, the RBA cut the cash rate to 0.1%, its lowest level in history. The aim was to keep borrowing cheap, support jobs and cushion the economy through an uncertain period. The strategy worked. Australia’s economy has recovered strongly, with unemployment falling to near record lows and consumer spending bouncing back. The challenge now is inflation. Rising prices across Australia and around the world are pushing central banks to tighten monetary policy. The RBA is facing the same pressure. With inflation climbing toward and beyond the RBA’s 2-3% target band, the board is under increasing pressure to act. RBA Governor Philip Lowe stated the board would assess incoming data on both inflation and labour costs over coming months before making a formal decision. The weight of economic evidence, and the signals from the governor, point strongly to a rate rise before the end of 2022.
What the big banks forecast
All four major Australian banks agree the RBA will lift the cash rate in 2022. Their economists differ on the size of the increase, but not the direction. Westpac is forecasting the cash rate will reach 1.25% by the end of 2022. NAB is slightly more conservative, tipping the rate to finish the year at 1.0%. Some independent property economists have gone further, with forecasts as high as 1.2%, putting their estimates close to Westpac’s. The consensus across all the major banks is that the first move will happen around June 2022. It is also worth remembering that banks can move their variable home loan rates independently of the RBA, so your lender’s rate may shift even between official RBA meetings. Keep an eye on any rate change notices from your lender.
RBA interest rate impact on your repayments
If you are on a variable-rate home loan, a cash rate rise will flow through to your repayments almost immediately. Lenders borrow funds from the RBA overnight at the cash rate, and when that cost increases, they typically pass it on to borrowers. A 0.25% rate rise on a $600,000 loan over 25 years adds roughly $85 to your monthly repayments. A full percentage point increase would add around $340 per month. Use our loan repayment calculator to model different rate scenarios for your own loan amount and term. If you are on a fixed rate, the impact is delayed. Your repayments stay the same until your fixed term expires, at which point you revert to the variable rate, which by then could be considerably higher. If your fixed term is ending within the next 12 months, now is a good time to review your options and consider what rate you might revert to.
Effect on property prices
Rising interest rates reduce borrowing capacity across the board, which puts downward pressure on property prices. Many property economists are forecasting a price correction of 10% to 20% as rates increase through 2022 and beyond. For sellers, that means the window to achieve peak prices may be narrowing. For buyers paying in cash, a price fall could represent a genuine saving. For buyers taking out a home loan, the situation is more nuanced. A 15% price fall on a $700,000 property saves you $105,000 upfront. But if your interest rate rises by 1.5 percentage points over a 30-year loan term, you could end up paying more in additional interest than you saved on the purchase price. The smarter question for most buyers is not just whether prices will fall, but whether you can comfortably service your repayments as rates rise. Check your borrowing power under a range of rate scenarios before committing to a purchase.
Steps to take now
Getting ahead of rising rates does not have to be complex. Here are some practical steps to consider:
Common questions
Q: When will the RBA raise interest rates in 2022?
All four major banks are forecasting the first rate rise will happen around June 2022. The RBA board meets monthly and will assess inflation and labour market data before making its decision. The governor’s public comments have strongly hinted that a rate rise before the end of 2022 is highly likely.
Q: How much will my home loan repayments increase if the RBA raises rates?
It depends on your loan size and term. As a rough guide, each 0.25% increase adds about $85 per month on a $600,000 loan over 25 years. If the cash rate rises from 0.1% to 1.25% as Westpac forecasts, that is more than $390 added to your monthly repayment on that same loan. Use a repayment calculator to model your specific numbers.
Q: Should I fix my home loan rate now to lock in a low rate?
Fixed rates have already risen in anticipation of the RBA moving, so the window to lock in historically low fixed rates has largely closed. That said, a split loan, part fixed and part variable, may still suit some borrowers. A mortgage broker can help you compare the current fixed and variable rates available and decide what makes sense for your circumstances.