What Will Your Repayments Look Like as Interest Rates Continue to Increase?

Following on from our June article, the Official Cash Rate (OCR) continues to increase aggressively (now sitting at 1.35% as at July 2022) and is tipped to continue to do so over the immediate short term. Each of the Big Four banks have detailed their predictions of where they feel the OCR will be:

  • CBA: 2.60% by November 2022
  • Westpac: 3.35% by February 2023
  • NAB: 2.85% by November 2022
  • ANZ: 3.25% by November 2022

Source: How high will rates go? Here’s what experts think about the RBA cash rate, ratecity.com.au, access date 28/07/2022: https://www.ratecity.com.au/home-loans/mortgage-news/high-will-rates-go-here-experts-think-rba-cash-rate

So how does this affect borrowers in terms of the likely interest rates they will pay when the OCR reaches the above predictions? Ratecity.com.au have published a very helpful table which lists predictions of interest rates borrowers may encounter if each of the above OCR predictions are realised:

Source: How high will rates go? Here’s what experts think about the RBA cash rate, ratecity.com.au, access date 28/07/2022: https://www.ratecity.com.au/home-loans/mortgage-news/high-will-rates-go-here-experts-think-rba-cash-rate

As a worse-case-scenario, let’s look at how the highest rate prediction i.e. an OCR of 3.35%  as forecast by Westpac & ANZ and the resultant average borrowing interest rate if this OCR were to eventuate may affect your loan repayment (whether it be a home loan, commercial property loan or a business loan).

In the above table, the forecast average borrowing interest rate would be 6.11% pa if the OCR reaches 3.35% pa. Therefore, based on a loan amount of $500,000 at 6.11% pa over a 30-year loan term, you can expect your repayment to be approximately $3,033 per month which is an increase of approximately $754 per month from $2,279 per month based on the average variable interest rate of 3.62% pa according to research conducted by canstar.com.au on 5 July 2022 (Source: https://www.canstar.com.au/home-loans/interest-rate-forecast-australia-2022/).

Such an increase would pose quite a strain on household and business budgets alike. But what if your loan was much higher, and what would your repayments look like? We have put together the below table to help you understand the approximate effect this may have on your budget:

Loan AmountMonthly repayments:
Average variable
rate 3.62% pa
Monthly repayments:
Average variable
rate 6.11% pa
Difference
$500,000$2,279$3,033$754
$750,000$3,418$4,550$1,132
$1,000,000$4,558$6,066$1,508
$1,500,000$6,837$9,100$2,263
$2,000,000$9,115$12,133$3,018
Assumes a 30-year loan term and Principal & Interest Repayments.

If course, if your loan term is shorter, then your repayments may be higher than the above. We have some very helpful calculators on our website, one of which is a Loan Repayment Calculator that you may use to get an indication of what your loan repayments may look like by inputting different interest rates, loan amounts and loan terms. Please feel free to use this calculator (as well as the others on our website) but note that you should not act on your own calculations alone without first discussing your specific circumstances with us, as these tools are just for general information only.

If you feel that you need to discuss your circumstances in detail with us, please feel free to contact us now. The important thing is early engagement, let us know if you think you may face difficulties as rates continue to climb, because lenders have hardship provisions that you may avail yourself of. However, we recommend that you only enter into such arrangements if it is absolutely necessary as such arrangements may have certain implications to your credit file and could potentially make borrowing difficult for you in future.

Otherwise, if you do not feel you will be impacted dramatically but would like to discuss your refinancing options to ensure you are getting a competitive interest rate notwithstanding the predicted interest rate hikes, please contact us now as you could be potentially paying more interest than you need to by doing nothing.

Disclaimer: The information provided herein is for general information purposes only and does not constitute specific advice. It should not be relied upon for the purposes of entering into any legal or financial commitments. Specific advice should be obtained from a suitably qualified professional before adopting any investment/financial strategy.