Finance

JULY 07, 2021

Why interest rates could be set to rise in 2022, and what it means for homebuyers

realestateview.com.au

By Jack Needham – This article was first published by ACM

One third of economists surveyed by comparison website Finder predicted an increase in the official cash rate before the end of 2022, with mortgage rates likely to rise in lockstep.

Variable mortgage rates typically follow movements of the official cash rate – it sets the rate at which banks can borrow money from institutional lenders and acts as a benchmark for interest rates on mortgages and term deposits.

“The official cash rate is basically the rate at which the bank borrows the money,” explained Finder’s senior home loan editor Sarah Megginson.

“If the cash rate goes up its likely that banks will increase their variable interest rate to maintain their profit,” she added.

“That’s why consumers need to keep an eye on rate rises.”

Of the economists Finder interviewed for the survey, many indicated that a rise in inflation rates would be pivotal to whether the central bank opted to increase the cash rate.

“The pace of job creation and broader economic progress (despite ongoing COVID lockdowns) suggests that the RBA will need to start increasing interest rates in 20 22/23, with November 2022 or February 2023 most likely based on current projections,” David Robertson, Head of Economic and Markets Research at Bendigo Bank said.

Mark Crosby of Monash University said that while “no rate rises until 2023 are well-flagged, though it will be interesting to see the next couple of inflation reads to see if this changes.”

The RBA had flagged that the cash rate won’t be lifted until inflation returns to the 2-3 per cent target band, with growth in wages a key metric.

Saul Eslake of Corinna Economic Advisory said that this was the correct approach, but that the central bank was being too conservative with its timeline.

“Where I differ from the RBA is that I think this criteria will be satisfied sooner than “2024 at the earliest”, in part because the continued closure of Australia’s international borders is resulting in faster reductions in the unemployment rate,” he said.

Banks already raising fixed rates

While cash rate predictions mean a rise in variable mortgage rates could be just around the corner, banks have already been raising their fixed-rate products, which are not tied to the official rate.

Ms Megginson said that this had been occurring since April, when record-low fixed rates reached their floor.

“It was end of April that I noticed them starting to creep up. That’s what we call the ‘floor’ of interest rates,” she said.

“All the big four banks have increased their fixed rates and I think there’s only a handful of mortgage rates under 2 per cent now,” she added.

This rise in rates meant that consumers thinking of locking in a fixed rate should move soon, but only if they were certain a fixed-rate product is right for them.

“If you were thinking about fixing now is the time to be doing it,” she said.

“Fixed rates are quite a bit cheaper than variable at the moment but you’ve got to make sure a fixed rate suits you. Whatever period you choose you’ve got to be pretty certain you’ll remain in the property for that long – there are some pretty hefty fees if you decide to end the mortgage earlier.”

Join us to keep up to date with property news, inspiration and advice.

realestateview.com.au

Finance
Related

RBA Interest Rate Announcement September 2021

Maintain the cash rate target at 10 basis points and the interest rate on E...

RBA Interest Rate Announcement September 2021

RBA Interest Rate Announcement – August 2021

At its meeting today, the Board decided to: maintain the cash rate target a...

RBA Interest Rate Announcement – August 2021

Stamp duty changes could boost prices, report finds

Changes to stamp duty could lead to a short-term rise in house prices but w...

Stamp duty changes could boost prices, report finds

The experts offer tips on how property investors can maximise their tax ret...

As the 2020/21 financial year ends, landlords will be looking to maximise t...

The experts offer tips on how property investors can maximise their tax return