Interest rates

The $ 1,386 repayment that could protect you when interest rates rise

Even though the official cash rate hasn’t budged this month, new research shows how being prepared now could offer you protection against your mortgage repayment when interest rates eventually rise. .

What’s the magic number your mortgage payments have to be if interest rates go up? Image: artieQ /

The cash rate has not been increased since 2010, which means most new homeowners have never experienced an interest rate hike on their home loan, at least not caused by a change in the cash rate. .

And it won’t rise this month either, as the Reserve Bank decided at its meeting today to keep the official interest rate on hold in August.

But rates will inevitably rise again, as the RBA has signaled it may increase the cash rate from 2024, at the earliest.

Economists at ANZ, Commonwealth Bank and Westpac have already seen the timing of a hike and expect the spot rate could be hiked by 0.25 percentage points three times.

Taking this into account, Canstar research analysts analyzed the numbers to determine the magic number your monthly mortgage payments should be now to provide a buffer and some protection against bill shocks when interest rates rise.

In this hypothetical scenario, a person who took out a 30-year loan with an average variable interest rate of 3.14% (according to our database) in early August would need a constant monthly repayment as below in order to to ensure its repayment does not increase with the spot rate.

So a person with a $ 300,000 loan in this scenario would have to increase their minimum monthly repayments by $ 98 – from $ 1,288 to $ 1,386 – so as not to feel any impact on their repayments when interest rates rise.

Amount of the loan Departure
$ 300,000 $ 1,288 $ 1,386
$ 500,000 $ 2,146 $ 2,310
$ 750,000 $ 3,219 $ 3,465
$ 1,000,000 $ 4,292 $ 4,620

Source: Prepared on August 2, 2021. Based on a 30-year loan at an average variable rate of 3.14% on our database, concluded in early August 2021. The loan has an amount as specified above, and is repaid in principal and interest repayments. The interest rate on the loan is assumed to increase with the assumed spot rate increases (0.25% at the end of the first three quarters of 2024). The required monthly repayment is one that ensures that the minimum required repayment will not increase above the repayment when the interest rate increases. This analysis, the cash rate increase assumptions and the results are provided for information purposes only.

Canstar’s money expert Effie Zahos said there is a good chance mortgage rates will move around 2024, as the RBA has reported, although rates are still low for now and could. stay for an extended period due to the impact of lockdowns on the economy.

Considering the outlook a few years from now, she said now is a great time for homeowners to create a tampon.

“If you have a paid job, there is probably very little point in changing your repayments to these magic numbers to avoid feeling the pain later,” Ms. Zahos said.

“Right now, many of us are finding that we are saving more money during shutdowns. There is no better place right now to put your low risk savings than to redirect the money into your mortgage to protect yourself from upcoming rate hikes.

“Yes, you would probably get better returns by investing in the equity market, but that’s a guaranteed rate of return right now. “

She said if borrowers haven’t taken out a fixed rate loan with an all-time high, it could be the next best option for providing guaranteed repayment protection.

“If you find yourself in a situation where you cannot increase your repayments, keeping your cash reserves in a clearing account or a new draw will help provide some kind of buffer,” Ms. Zahos said. “When your situation returns to normal or your income stabilizes again, make your mortgage a priority. “

There are 181 mortgage interest rates below 2% in Canstar’s database, of which 161 are fixed and 20 are variable.

The lowest variable rate in our database, based on a $ 500,000 loan for homeowners paying principal and interest, is currently 1.77% (comparison rate of 1.86%) for a 60% loan-to-value ratio (LVR) or 1.88% (comparison rate of 1.97%) for 80% LVR.

The lowest fixed rate for homeowners paying principal and interest is 1.69% (comparison rate 3.49%) for a fixed year.

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