2020 and 2021 saw record low interest rates hit Australia’s shores, but what will home loan interest rates look like in 2022?
While we can’t tell you exactly what might happen to interest rates in 2022, we can provide some predictions. Due to the unpredictable nature of the COVID-19 pandemic, things can change rapidly with the onset of new variants and new challenges.
It’s a good idea to stay on top of news regarding Australia’s economy and property market so you can make informed decisions about your home loan and property buying.
In this article, we’ll look at whether rates are likely to increase or decrease, how to prepare for an interest rate hike, and whether fixing your interest rate is a smart move.
Are interest rates likely to rise or fall in 2022?
Interest rates are likely to increase in 2022, based on trends seen in 2021, predictions from economists and movements from various lenders.
These rate increases likely won’t come as a result of changes to the official cash rate (OCR). However, even if the Reserve Bank of Australia (RBA) chooses not to increase the cash rate, banks have already started raising interest rates.
This can be seen in the rising fixed home loan rates across many Australian banks and lenders in late 2021. Home loan interest rates below 2% are already becoming rarer, but any rate increases in 2022 are expected to be marginal.
So, this doesn’t mean that you should panic or that your repayments will suddenly increase dramatically. Rates have been at historical lows recently, so the gradual increases we are seeing are part of the economy correcting itself after a volatile two years.
Why are home loan interest rates increasing?
There are multiple factors contributing to a rise in interest rates. Here are four of them:
Economic recovery after the pandemic: Interest rates were reduced to help borrowers during a difficult economic time but due to positive economic growth, rates will start to go up
The end of the Term Funding Facility (TFF): The RBA introduced the TFF in March 2020 to encourage lending to households and businesses. It gave lenders lots of funding at a low interest rate of 0.25% which enabled lenders to pass on lower rates to their customers. However, the TFF ended in June 2021
To account for rising costs of business: For some lenders, the cost of business operations has risen and they need to cover this through increased interest rates. Sometimes lenders will just increase rates for profit, rather than out of necessity
Expectations of a cash rate increase: While the cash rate may not increase for some time, you can bet that rates will go up when it does.
Will the official cash rate stay the same in 2022?
RBA governor Philip Lowe has indicated that the cash rate won’t be raised until inflation is within the 2-3% target range.
The RBA previously suggested a cash rate increase in 2024, but economists believe that the cash rate could be increased in late 2022 or early 2023.
One benefit of the eventual cash rate increase is that it could influence a downturn in house prices due to borrowers having reduced budgets. This has the potential to help first home buyers with smaller budgets enter the property market.
How to prepare for an interest rate hike
As interest rates increase, so will your monthly repayments. So, it’s a good idea to be prepared. Here are some tips:
Review your finances: take a look at your budget to see where you can save money so that you are less impacted by rate increases
Make extra repayments: if you can, making extra home loan repayments decreases your loan balance resulting in you being charged less interest
Minimise other debts: if you have other debts (e.g. credit cards, personal loans or car loans), try to pay them down or use debt consolidation to alleviate stress.
Consider refinancing: make sure that your current loan still suits your needs and is competitive when compared to other home loans on the market
Look into fixing your interest rate: switching to a fixed interest rate can provide a sense of security knowing that your interest rate will remain unaffected by rate hikes
Be smart with your savings: increased interest rates can be beneficial if you have funds in a high interest savings account. Alternatively, opening an offset account to reduce your interest charges could help.
In October 2021, the Australian Prudential Regulation Authority (APRA) increased the minimum interest rate buffer that lenders use to assess the serviceability of home loan applicants.
This buffer (now increased to 3%) is supposed to account for interest rate increases to ensure borrowers will still be able to make repayments if their interest rate rises.
Should you fix your interest rate in 2022?
It depends on your individual situation. A fixed interest home loan offers stability and security at a time when the economy has been volatile.
With a fixed rate mortgage, your interest rate won’t be affected by any rate fluctuations during the fixed term. So, borrowers can lock in a fixed interest rate for the next 1-5 years and not have to worry about rates rising.
However, if you are used to having a variable rate home loan, there are a few differences you should be aware of before making the switch to a fixed rate:
Less flexibility: you may not be able to make unlimited extra home loan repayments with a fixed rate loan, and doing so could result in your lender charging break fees
Fewer home loan features: it’s less common to have loan features like a redraw facility or offset account with a fixed rate home loan
Rate doesn’t change: for better or for worse your rate stays the same throughout your fixed term on a fixed rate mortgage. So, if interest rates drop below your fixed rate, you won’t benefit
Refinancing can be complicated: if you refinance your fixed rate mortgage before the fixed period expires, you could face break charges.
There are still some competitive fixed mortgage rates out there, so if you’re interested, it’s a good idea to start moving. If you’re not sure where to start, get in touch with your local Aussie Broker today.
