Australia’s official interest rate is at a record low of 0.10 per cent, but Australia’s lenders are beginning to increase interest rates on longer-term loans.
Several lenders have increased their four-year fixed interest rates, while UBank last week announced it would increase its three-year fixed rate from the market leading 1.75 per cent to 1.85 per cent.
Also read: Westpac to hike fixed mortgage rates
While the Reserve Bank of Australia is unlikely to raise rates in the near future, an inevitable rate hike could be costly for Australia’s borrowers, the University of Tasmania’s economist Mala Raghaven said.
“The recent uptick in buying behaviour largely appears to be due to the fear of missing out, and many buyers are rushing into the market without clear foresight of the impending risks.
“When mortgage rates start rising, many households will risk being unable to service their loans, and could be vulnerable to foreclosures,” she said.
A 0.25 percentage point hike would cost the average mortgage holder an additional $26,330 in interest, Finder analysis found.
That’s based on a $495,420 mortgage with a 4.27 per cent variable rate. An increase to 4.52 per cent would mean an extra $878 in repayments, adding up to tens of thousands of dollars over a 30 year loan.
However, if you had a $1,000,000 mortgage, you’d be looking at an $53,146 extra in interest over the life of the loan. And your monthly repayments would increase by $148.
According to Finder’s Consumer Sentiment tracker, however, an increase of $200 or more in monthly repayments would trigger financial distress for 41 per cent of borrowers.
That means borrowers need to think carefully about their home purchasing decisions and continue to chase lower rates, Finder’s head of consumer research Graham Cooke said.
“The last time the cash rate was held for an extended period of 34 months, banks changed their interest rates on average 7 times – 5 of which were increases,” Cooke said.
“It’s important that homeowners factor in potential rate increases when applying for a mortgage – keeping a cushion in your budget can keep your budget from getting dicey down the track.”
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