Increased Interest Rates: The Fixed Rate Rollover

Many people, even those who were not looking to buy new properties, were enticed in recent years as the pandemic spread and interest rates were at their lowest. Because of the low interest rates, it was an ideal time for homeowners to diversify their asset portfolio, but this may no longer be sustainable with rising interest rates in the near future.

Borrowers have already been warned to start preparing for higher interest rates as commodity prices such as oil, gas, and coal pile pressure on the central bank to raise rates to control rampant inflation.

The Reserve Bank of Australia's Governor, Philip Lowe, recently warned that the low inflation psychology that has supported record low interest rates may be changing.

The Reserve Bank of Australia's fate now appears to be a series of interest rate increases beginning in June, after the central bank dropped its willingness to be "patient."

The market anticipates that the RBA will begin raising interest rates in the third quarter of this calendar year, with a total of four rate hikes by the end of December. However, there is considerable disagreement about the magnitude of the RBA's adjustments.

During the bank earnings season last month, bank executives advocated for a cautious approach to rate hikes in order to reduce the risk of economic shocks. 

Even in this case, homeowners who have taken out a loan or refinanced in the last two (2) years will find the transition from low to high interest rates difficult to manage. Homeowners will be stressed, and many more Australians will face financial difficulties.

According to Martin North, the Principal of Digital Finance Analytics, the number of households experiencing mortgage stress will continue to rise as interest rates rise 2 percentage points from their current record low of 0.1 percent.

Credit to: ABC News

While some households may be able to keep up with the rate increase, this is not true for all homeowners. 

As interest rates increase, fewer mortgage holders will be able to refinance into a lower interest rate for lower monthly payments.

Higher interest rates also weaken  your buying power. 

As interest rates rise, so does housing affordability.

If mortgage interest rates significantly rise this year and you are planning to purchase a new house, chances are you may end up buying from a lower price range. 

As reported by 9News, the average Australian home is currently increasing in value at the fastest rate since June 1989, adding 22.4 percent or more than $130,000 in just a year

But if interest rates are raised multiple times in 2022, a person earning $100,000 per year will see their maximum borrowing power fall by $31,900 to around $719,100.

A person earning $150,000 per year would see theirs drop by $46,200, while someone earning $200,000 would see theirs decline by $61,400.

What does an increase in interest rates mean for borrowers whose fixed-rate mortgages are about to expire?

Previously, being able to lock in low interest rates was a success, but continuing the deal will be a difficult road for mortgagors.

Many Australians have been attracted by fixed interest rates over the last two (2) years, with nearly half of all new loans falling under this term. This will have to end soon, and mortgagors will be looking at refinancing.

You will face several interest rate increases at once, and this rate may no longer be in line with your financial situation.

And this shift will have a significant impact on households.

Because everything is increasing in price right now, most households' spending power is at an all-time low. This will be exacerbated further if loan interest rates rise. And taking steps to brace for much higher rates when fixed interest rates loan periods ends will not be easy. 

ANZ Bank also predicts that house prices will rise this year but fall by 2023. This means that borrowers with fixed-term loans expiring in 2023 are paying more for a home that will eventually fall in value in the coming year.

Bottom Line

Interest rates will remain low indefinitely, and the rate at which they will rise is difficult to predict because our economy is only now beginning to recover from the pandemic's drawbacks. Any increase in the rate market will have serious consequences for our household finances.

Sandcastle Finance can assist you in finding solutions if your fixed rate loan is about to expire and you need to shop around for a new one that will not have a significant impact on your financial situation. 

Schedule a call with us right away to check your refinancing options. 

Sally Prowse