How much could your mortgage payments cost if interest rates rise?

New figures from the Australian Bureau of Statistics (ABS) show a 3.5 per cent jump in inflation over the past year. If rising inflation forces the Reserve Bank of Australia’s (RBA’s) hand into increasing the national cash rate, what could this mean for the household budgets of Australia’s mortgage holders?

According to the ABS, the Consumer Price Index (CPI) rose 1.3 per cent in the December 2021 quarter and 3.5 per cent annually. Annual trimmed mean inflation increased to 2.6 per cent, up from 2.1 per cent in the September quarter.

Don’t panic

In the past, the RBA board has stated that it doesn’t intend to increase the cash rate until inflation is sustainably between 2 and 3 per cent – a condition that it previously forecast shouldn’t take place until 2024, or later 2023 at the earliest. 

It remains to be seen whether this latest ABS data could affect the RBA’s best laid plans. While the increase to trimmed mean inflation was described by the ABS as “the highest since 2014”, it is not yet known whether the jump could be a temporary blip, or the start of the sustained and consistent inflation growth that the RBA wants to see before pulling the trigger on raising the cash rate.

How much could your home loan repayments increase if variable rates rise?

Whenever the RBA chooses to increase the national cash rate, banks and mortgage lenders will likely increase the variable interest rates on home loans to match. This will likely raise the cost of home loan repayments, affecting the household budgets of many Australian home owners and property investors.

As a hypothetical example, imagine a borrower recently took out a home loan of $595,568, which was the national average mortgage size for owner-occupiers in November 2021, according to the Australian Bureau of Statistics (ABS). Assuming the borrower is making monthly principal and interest repayments over 30 years, and currently has a variable interest rate of 2.59 per cent (the average for new loans in November 2021 according to the RBA), they’d be paying $2381 per month.

Here’s how much more their loan could cost if the RBA increased the cash rate from the current record low 0.10 per cent to 0.25 per cent:

Source: Moneysmart. This hypothetical example does not account for fees or future interest rate changes, and is for demonstrative purposes only.

Borrowers with fixed rate home loans may be spared these increases for a limited time. Their home loan repayments should remain consistent until the end of their fixed rate term, after which their loan will revert to their lender’s variable rate. This could potentially lead to cases of bill shock and mortgage stress if variable rates were to increase substantially.

A sustained period of rate rises could potentially lead to significant increases in home loan repayment costs. Westpac economists recently forecast that the cash rate could rise to as high as 1.75 by March 2024, increasing home loan repayments by as much as $427 per month.

The next meeting of the RBA board is due 1 February 2022.

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