Inflation is affecting more Australian households than ever before (at least in our lifetime), so it is no wonder home buyers are biting their nails in anticipation wondering how the next rate rise will affect them.

We know it’s almost impossible to plan ahead on your monthly mortgage repayments when you’re anxiously awaiting the Reserve Bank of Australia to make the latest interest rate announcement… So let us alleviate some of your stress with super useful information about the forthcoming interest rates, and how they might affect your finances.

Predicting the interest rates rise

Recently, clients have stopped asking “when will interest rates increase?” and “how much will this next rate rise be?”. Instead, I’m asked, “when will these rate rises stop?” And “how high will they climb?!”

This is very telling of the times we live in, and not even the most accomplished economist could answer these questions with 100% accuracy. Firstly, since interest rates are increasing from record lows, it is difficult to predict how households will respond to these rate rises over time.

While we can never be certain of when the increases will slow down or even start to drop again, we should feel some assurance in the fact that due to increased levels of household debt, the RBA are unlikely to raise interest rates to 5% or even 6% to control inflation as they have in the past.

The major banks however do provide their own predictions on when the peak of the rate-tightening cycle will occur, so let’s take a look.

The NAB predicts a peak of 2.25% by the end of 2024, while ANZ believes the cash rate will climb to 2% by the end of 2023. Similarly, Westpac predicts a peak of 2% by mid-2023, and Commonwealth Bank remains the most optimistic, with a cash rate peak of 1.25% in early 2023.

With these predictions, we can at least loosely plan our finances for the short-term.

Predicting the first interest rate hike

Judging by what the RBA has done in the past when moving the cash rate, we can expect the first interest rate hike to move by 0.15%, to get us back to 0.25%.

Following this, the RBA is likely to move in 0.25% increments from there on.

Predicting how your monthly home loan repayments will be affected

“0.15% increase? Oh Kitty, you had us worried for a second there!” OK guys, you got me. Perhaps that isn’t so bad as far as rate hikes go. But before you know it, as interest rates continue to climb so too do your monthly repayments. 

Let’s look at some examples based on if you’ve got a home loan with a 30-year principal and interest loan, with an initial 2.5% interest rate. Standard stuff. 

So, you’re paying off a $250,000 home loan on that lovely little apartment you’re nestled into right now. Aww – sweet! With a 0.15% increase, you’ll be paying an extra $19 per month towards your mortgage. Alright, that’s manageable – until the interest rates increase by 2% and you find yourself forking out an extra $279 per month on top of your scheduled repayments…

You’ve taken out a $750,000 home loan on a gorgeous 3-bed home in the Lower Mountains? Nice work, you! While an extra $59 per month on a 0.15% increase may not seem so bad, the whopping $557 per month on top of your regular repayments may start breaking the bank – big time.

Got a snazzy home here in Sydney? Ooh la la! A $2mil home loan with a 2% interest rate hike will see you paying an added $2,232 to your monthly repayments. Ouch…

Predicting when interest rates will rise

We know that the RBA doesn’t like to raise interest rates during election campaigns, so we made it through that part thankfully.

Typically, conditions should be met before the cash rate increases again, and this includes full employment, sustained wage growth, and increasing inflation. We’ve definitely got the inflation part down pay, am I right?

But with this in mind, keep your eyes peeled for an announcement regarding interest rate rises in June 2022, which means borrowers with a variable-rate home loan will have approximately one month to prepare their finances to increase their mortgage repayments.

Don’t worry guys. With the help of my fab Kitty & Miles team, we will help find you a home within your budget, despite the interest rate activity.