Home loan rates rise as lenders’ borrowing costs rise.
Every month, at Finder, we analyze all the loans in the database (thousands of them) and find the lowest rates on the market. And every month since June 2019, the lowest mortgage rates in the market have fallen or stayed the same. Until this year.
In January, the lowest variable rate on the market (homeowner, 20% deposit) went from 1.77% to 1.85%. The lowest fixed rate went from 1.59% to 1.79%.
Lenders have been slowly adjusting rates upwards on some loans for a few months now, but we are now seeing this becoming a broader trend affecting all loans. Australian mortgage rates have bottomed out and are on the rise.
All economic signs suggest that rates will only rise further this year. Here’s why.
Rates can’t really come down much
It may seem obvious, but interest rates can only go so low. In recent years, lenders have lowered rates to historic lows. Right now, you can get a loan with a rate well below 2.00%. This makes borrowing costs incredibly low. It was never going to last.
Everyone Expects US Interest Rates to Rise
The US Federal Reserve is expected to raise interest rates this year to curb inflation. This means that the cost of borrowing from US lenders will increase.
This will affect Australian lenders because a significant portion of the money they use to fund the home loans they make to borrowers comes from the US money markets.
This explains why lenders are already raising fixed interest rates. “Banks are forward-looking and source their funding from around the world, with the US being a particularly important source of funds for Australian lenders,” said Cameron Micallef, editor of Finder.
“The last thing an Australian lender wants is for rates in the US to rise significantly, for the cost of their repayments to rise and for customers to be locked into a cheaper rate than what the bank is getting. .”
When will the RBA move rates?
In Australia, the Reserve Bank (RBA) sets the official exchange rate, which determines borrowing costs for lenders in the same way as the US Federal Reserve rate. This has a direct impact on how lenders price their variable interest rate loans.
The cash rate has never been lower than its current rate of 0.10%. The Reserve Bank has suggested it won’t raise the exchange rate in 2022, but many experts believe it may have to. In December, 46% of experts in the Finder Cash Rates Survey predicted a rate hike in 2022.
And with the Fed making noise about rate hikes in the US, the case for an RBA move only grows stronger.
But Australian lenders are free to make their own rate decisions. And they clearly are. A quick scan of loans in Finder’s database showed that in the first 18 days of January, lenders raised rates on 138 home loans. Only 13 rates fell during this period.
What should borrowers do in the face of rising rates?
If you’ve already paid off your home loan, you have nothing to worry about right now (that’s why you paid off!). But it’s worth watching how rates move and being prepared when your fixed rate ends. Your lender may offer you a variable rate that is higher than your current rate.
If this happens, it’s time to refinance your home loan to a more competitive offer.
If your home loan has a variable rate, you will need to monitor what your lender is doing. Check your home loan statement (it will be online and your lender can mail it to you monthly) and see if your rate has gone up.
Rates seem likely to go up for most borrowers at some point, so a small uptick doesn’t mean you should panic. But if you look around and see better deals elsewhere, it might be worth refinancing.
And the other step every borrower can take now is to prepare financially for rate hikes. Use a loan repayment calculator to see how much a rate hike will affect you, and ask yourself if you can afford it.
If your interest rate is 2.00%, increase it to 3.00% and see the amount of your repayments. Then try 3.50%. This will show you how much you may need to cut back on spending or saving commitments elsewhere.
If you think you can’t afford higher repayments, you may be in mortgage trouble.
Need a home loan? Compare more home loan rates on the market or check out our top home loan picks.