Unfortunately, no-one has a crystal ball that can accurately predict interest rate movements. Although interest rates in Australia are currently at record lows (and some analysts are even tipping they could fall further later this year), history suggests that they’ll inevitably rise again. After all, a home loan is a long-term commitment. It’s not a case of “if” interest rates will rise, it’s “when”.
So it’s important to understand how an interest rate rise would affect you.
According to the latest figures from the Australian Bureau of Statistics, the average home loan in Australia is $388,000. Variable interest rates are currently around 5%. Let’s do the maths and see how your monthly repayments would change on a loan of that size if interest rates increase, assuming that you have 20 years remaining on your loan.
If interest rates increase to 5.5%, your monthly repayments would increase from $2,561 to $2,669.[i] That’s an increase of $108 per month, which is an extra $25,920 in interest over the life of your loan.
So although a half per cent interest rate increase doesn’t sound like much, it adds up!
If interest rates increase to 6%, your monthly repayments would increase from $2,561 to $2,780. That’s an increase of $219 per month over your current repayments, which is an extra $52,560 in interest over the life of your loan.
If interest rates increase to 7%, your monthly repayments would increase from $2,561 to $3,008. That’s an increase of $447 in monthly repayments and a whopping $107,280 in interest charges over the life of your loan.
Some of those numbers are a bit scary. The smart thing to do is to insulate yourself as much as possible against future interest rate rises. There are two ways you can do that:
1) Pay off as much of your home loan as possible while interest rates are low. That way, if/when interest rates do rise, it won’t affect you as much. For example, by increasing your monthly repayments now if you can afford it, or by paying any lump sums you might receive off your home loan (such as work bonuses or tax refunds).
2) Fix your repayments for 1 to 5 years, so you’ll have certainty over your repayments. That can be a good strategy, especially if you’re planning to start a family and you may be on a reduced income for a period of time. However, if interest rates drop, you’ll be stuck at your fixed rate.
At Fast Repay Home Loan, we help our clients to implement strategies like these so they can become debt-free and own their own homes as soon as possible. Whether you’re looking to take out a home loan or to refinance, we’ll take the time to understand your needs and goals so we can provide you with the best possible advice.