Homeowners and prospective borrowers alike may be anxious to find out how high their mortgage rates will climb as the Reserve Bank of Australia (RBA) is on track to gradually increase the cash rate over a span of two years, after having kept it low for more than 10 years. It’s important to understand how this will also impact your credit reports and credit scores.
What are the predicted interest rates?
According to the reports from the major four banks, variable mortgage rates for owner-occupiers could soar to 6.61% by mid-2023. This estimate is based on their predictions of cash rate movements in the coming years, so be sure to keep an eye out and plan ahead!
Predictions of Big Four Bank’s Cash Rate:
- CBA: By February 2023, interest rates are anticipated to drop as low as 3.35%, and by December of that year, will have decreased further to 2.85%.
- Westpac: By May 2023, the percentage will reach 3.85%, and then by November 2024, it is expected to drop to a rate of 2.85%.
- NAB: Over the course of three years, 3.60% is projected to remain secure and steady until 2024. interest rates
- ANZ: By May 2023, the percentage will hit 3.85%, and by November 2024 it is projected to drop even further to 3.60%.
*Disclaimer: (It is important to remember that these estimations may be revised at any time, since big banks are known for adjusting their predictions. However, all figures have been verified and remain accurate as of the moment they were published.)
What about last years rates?
In April 2022, the cash rate initially began at 0.10%, and these estimations from the four major banks may lead to a potential rise of up to 375 basis points in interest rates for home loans within one year’s time.
In a recent interview with ABC, Adelaide Timbrell of ANZ cautioned that there is increased risk from inflation which could lead to RBA’s cash rate hikes beyond 4%. In fact, their latest forecast suggested the peak levels may reach 3.85%, signifying at least four more increases are in store for us.
If you have a variable home loan with your lender, and they pass the rate hikes on to you in full, then it’s possible that your mortgage repayments could become increasingly costly over the next two years. Currently, for existing occupants looking at an average variable home loan rate prior to cash rates rising again this April 2022 is 2.86%, per RBA findings.
How far will your repayments soar?
RateCity has analysed the potential effects of the rate hikes on a 25-year, $500,000 home loan.
If your lender follows Westpac’s predictions and passes along every cash rate hike to your home loan, you’ll likely find yourself repaying an additional $1,075 on a monthly basis in May 2023 compared to April 2022. This is assuming that you are currently making payments for a variable rate loan.
Putting aside this amount is a large ask for homeowners, but it’s doable – the same as taking care of two utility bills or going on a memorable weekend getaway! Homeowners should consider doing what they can now to make sure they have enough room in their budget when higher repayments come into play. This might include securing a fixed interest rate.
The impact on your credit report and credit score
Interest rate rises in Australia do not directly impact your credit score. However, they can indirectly affect your creditworthiness and financial situation in several ways. This can include:
- Increased financial pressure: some borrowers may struggle to make timely payments, which could negatively impact their credit score if they begin to miss payments or default on loans.
- Heightened importance on credit score: as lenders become more cautious and may tighten their lending criteria and borrowers with higher credit scores are often rewarded with lower interest rates, potentially saving thousands of dollars over the life of a loan.
- Indirect effects on credit behaviour: consumers and businesses may cut back on spending and borrowing, some individuals might increase their credit card usage to cope with higher living costs. Others might pay down debts more aggressively to reduce their exposure to higher interest rates.
- Impact on loan applications: Lenders may place greater emphasis on credit scores when assessing loan applications and may not consider applications from individuals with credit scores below a certain threshold.
If you maintain a good credit score, you’ll be better positioned to secure favorable loan terms and lower interest rates, even in a rising interest rate environment.
