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How much extra your mortgage will cost if the RBA hikes today

Mortgage repayment chart and cash
The RBA could be about to pull the trigger on interest rates. Do you know how much it'll cost you? (Source: Getty)

This is Part one of a two-part column by our columnist and the author of How to Get Mortgage-Free Like Me.

Today is the number crunching: how much rate rises could hurt your hip pocket. Tomorrow is how to fight back against rate rises… you DON’T just have to wear the pain.

The Reserve Bank has its finger on the interest-rate trigger. And it will probably pull it as soon as today.

The RBA’s principal responsibility is to keep inflation in a tight target range between two and three per cent. And thanks to supply shortages and the Putin petrol effect, it cannot ignore a spike to the highest level in two decades, 5.1 per cent.

Read more from Nicole Pedersen-McKinnon:

Indeed, many other central banks around the world have already raised rates. New Zealand recently upped its official interest setting by 0.5 per cent, the largest single move in that country in 22 years.

Experts are unanimous that Australia’s cash rate – currently 0.1 per cent – is at an all-time, economic-emergency low that is no longer appropriate. Our Reserve governor, Philip Lowe, has also foreshadowed as much.

So how much pain would a hike inflict?

Here, exclusive to Yahoo Finance, is the amount your repayments would rise at every loan size.

Not that interest levels will lift fast, but I have also included what could happen to your monthly commitment if they eventually go far.

(Source: Nicolessmartmoney.com, using the My Mortgage Freedom Date app. *2.5 per cent assumed interest rate today; 25-year loan.)
(Source: Nicolessmartmoney.com, using the My Mortgage Freedom Date app. *2.5 per cent assumed interest rate today; 25-year loan.)

You can see that at the half-a-million-dollar level, an initial rate rise costs you $64, increasing to $72 by the 10th.

It’s about double that amount at borrowings of $1 million; $127 for the first and $145 by the 10th.

More concerning is what happens if rates reach a height we have seen in comparatively recent history… just prior to the credit crack up, in 2007, they were pushing 8.75 per cent.

So these are the final – albeit scary – numbers I crunch. You can calculate your precise repayment predicament, based on your exact loan size and interest rate on my free app: My Mortgage Freedom Date on Apple and Android.

At a $500,000 loan size, an 8.75 per cent interest rate hurts $4,111 a month.

At $1 million, that leaps to an eye-watering $8,221.

What is also important – and possibly motivating as it only applies if you stay for the contracted 25-year term – is the total interest you would ultimately pay.

How much in total you could donate

Today, a $500,000 loan that runs full term would cost you $172,926 in interest. At double the current typical mortgage interest rate, five per cent, your interest bill is $376,886.

The equivalent figures for $1 million are $345,851 at rates today, and $753,771 by five per cent.

The interest on a $500,000 loan grows to the same as you borrowed in the first place at a rate just above 6.25 per cent. So that $500,000 property costs you $1 million.

And at an 8.75 per cent interest rate, you push above the $1 million interest bill once borrowings are almost $700,000.

<em>(Source: Nicolessmartmoney.com, using the My Mortgage Freedom Date app. *2.5 per cent assumed interest rate today; 25-year loan.)</em>
(Source: Nicolessmartmoney.com, using the My Mortgage Freedom Date app. *2.5 per cent assumed interest rate today; 25-year loan.)

Give yourself rate cuts instead

Rather than enduring this huge potential cost impost, there is much that can be done.

Stay tuned for Part two of my column tomorrow, when I will outline the top strategies to fight back against the looming rate hikes.

Far from being at the mercy of the Reserve Bank, you can wrest back control.

Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook, Twitter and Instagram.

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