Rate rises are coming and Aussies need to be prepared, Reserve Bank of Australia (RBA) governor Philip Lowe says.
“One of the things that I think will happen is that interest rates will go up. I can't tell you when, but they will go up,” Lowe said.
There are more than 1.1 million mortgage holders in Australia that have never experienced a rate rise.
Lowe said it was important for those people to be prepared for the inevitable change to come.
“The advice that I would give to people is, make sure that you have buffers. Interest rates will go up,” he said.
“And the stronger the economy, the better progress on unemployment, the faster and the sooner the increase in interest rates will be.
“So interest rates will go up. We need to be prepared for that. And people need to have buffers.”
What will happen when the RBA hikes?
It has been more than 11 years since the RBA increased official rates, with the last hike in November 2010.
Since then, the RBA has cut the cash rate 18 times - meaning anyone who bought their first home in the past decade has never experienced a hike.
“It’s incredible to think there are well over 1.1 million households that have never experienced a cash rate hike,” Tindall said.
“Australia hasn’t seen an RBA rate rise in more than 11 years, which means there is a generation of mortgage holders who could be in for a shock when their monthly repayments automatically start rising.”
How much will my mortgage repayments rise?
Canstar research found that a cash rate hike of 0.5 per cent would take the average variable rate to 3.55 per cent.
If lenders were to match the increase, someone with a 30-year, $500,000 mortgage could pay an extra $137 per month.
A cash rate hike of 1 per cent would take the average variable rate to 4.05 per cent.
This means the same borrower above could see their repayments increase by $280 per month.
If the cash rate rose in line with Westpac’s recent 1.65 per cent forecast, the average variable rate would increase to 4.70 per cent.
This would mean the same borrower above could face an extra $471 per month in mortgage repayments.
What does it mean to ‘have a buffer’?
While no one likes the idea of their mortgage repayments going up, most Aussies are in a position to deal with it.
Lowe said data showed many Aussies had extra funds available and should be able to meet higher repayments.
“The positive news is that when we look at the data, most households are paying off more than is required by the current level of interest rates,” Lowe said.
“They're keeping money in their offset accounts and redraw facilities. So there's a lot of capacity for many borrowers to keep their current level of spending even with higher interest rates because they've built up the buffers.”
What if I can’t afford the rate rise?
It is good to keep in mind that rates likely won’t jump from 0.1 per cent right to 1.65 per cent overnight.
They will gradually increase, probably by around 0.15 to 0.25 per cent each time, so there will be time to adjust.
It is also important to remember that even at 1.65 per cent, rates would still be considered very low.
Interest rates in Australia have averaged around 3.94 per cent in the past three decades.
Rates reached an all-time high of 17.5 per cent in January 1990 and an all-time low of 0.1 per cent in November 2020.
In the worst-case scenario, contact your bank to talk about your options if you really can’t afford higher repayments.