Expect rising rates on your home loan, but there are savings to be had

No doubt you’ve heard the news that the next official move in interest rates will be up.

It’s no longer a matter of if, but simply when this will happen.

It’s entirely plausible it could happen this year. In fact, that’s what most economists expect.

The prospect of rate hikes is somewhat unsettling.Credit:Dionne Gain

As of this week, Westpac economists are now tipping the first official rate hike of 15 basis points will occur in August, followed by a 25 basis point hike in October and another in December.

That would mean that by Christmas, the Reserve Bank would have removed all the support it offered to the economy during the pandemic through a lower cash rate.

Looking into 2023, Westpac economists expect the cash rate to rise another full 1 percentage point.

Ouch.

Of course, these are just forecasts. The Reserve Bank itself remains adamant it will be ‘patient’ and wait until it is sure wages growth is accelerating sufficiently before it removes interest rate support for the economy.

The prospect of rate hikes is, I must confess, somewhat unsettling to me.

With my economist hat on, I like the idea. Higher interest rates would be a sign that our economy has been deemed healthy enough to keep generating jobs and income growth, without the need for historically extraordinarily low borrowing rates. Higher rates will also help to put a lid on runaway house prices which have been pushing young people out of what should be a basic human right to safe and stable shelter.

It would be wise for all home borrowers to take some time this weekend to make sure their current interest rate is still the lowest they could be paying.

As the owner of a rather large mortgage, of course, it’s something I’m watching rather closely.

Since I took out my mortgage nearly two and a half years ago, I have only known interest rate cuts. When I first took my loan out, I was on an interest rate of about 2.69 per cent. Today, I am locked in at 1.84 per cent until the middle of next year.

Of course, it’s important for all borrowers to remember their lender will have stress-tested them at application on their ability to service higher interest payments. You might not want to, of course, but you should be able to find room in your household budget.

Still, it would be wise for all home borrowers to take some time this weekend to make sure their current interest rate is still the lowest they could be paying.

The bad news is that most of the sub-2 per cent fixed-rate deals are gone. Now that interest rates are forecast to go up, banks just don’t want to lock you in at such great deals for as long.

The good(ish) news is that most major banks have actually been cutting variable rates in recent weeks, at least those offered to new customers with a high amount of equity and making both principal and interest payments.

On Friday, Commonwealth Bank cut its best variable interest rate offering by 0.10 percentage points to 2.19 per cent for borrowers with loan-to-value ratios (LVRs) of up to 70 per cent. This now puts it on par with both NAB and ANZ.

Westpac appears to lead the pack, offering a variable rate of 2.09 per cent for such borrowers. Although I checked it out, and while there are no fees on this basic-style loan, there also appears to be no ability to have an offset account. Offset accounts can often save you quite a lot of interest because any cash or emergency savings you park in there reduces the net value of what you owe by that amount, thereby cutting your interest payable.

If you look outside the big four, of course, there are even bigger savings to be had.

‘Variable rate mortgage holders have a window of opportunity to get themselves a rate cut before the RBA makes its move.’

According to the RateCity database, there are still five lenders offering fixed rate loans of under 2 per cent and a whopping 35 lenders offering variable rate loans below 2 per cent, including some big names like Citi and HSBC.

Reduce Home Loans, Homestar Finance and Pacific Mortgages Group appear to be offering the lowest variable rates in the market at 1.79 per cent, although loan size and LVR restrictions may apply. Online lenders Tic:Toc and Homeloans.com.au are offering 1.89 per cent variable.

Yes, these variable rates will all rise when the Reserve Bank does start hiking the official cash rate.

But it helps to make sure you’re starting from the lowest possible starting point when that occurs.

“Variable rate mortgage holders have a window of opportunity to get themselves a rate cut before the RBA makes its move,” explains RateCity research director Sally Tindall.

“If your bank is offering a lower variable rate to new customers than what you’re on, get on the phone and haggle. A rate cut now will help cushion the blow when variable rates do rise.”

Canstar finance expert Steve Mickenbecker also stresses that these deals are not being offered to existing customers.

“Borrowers who have had their loan for five or six years are likely to be making repayments on a package loan with an interest rate at least 1.2 percent above Westpac’s best rate. That’s around $316 a month more on a $500,000 loan, and there are higher fees.”

That’s about two tanks of petrol at today’s eye-watering pump prices.

Housing remains by far the biggest expense in most household budgets. Don’t forget to check in and make sure you are paying the lowest interest rate possible.

  • Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

Jessica Irvine is author of the new book Money with Jess: Your Ultimate Guide to Household Budgeting. You can follow more of Jess’ money adventures on Instagram @moneywithjess and sign up to receive her weekly email newsletter.

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