You Could Be Paying $697 More Per Month On Your Mortgage!! Budget Series [Special]
The Reserve Bank of Australia (RBA) have finally increased the cash rate after 12 years of decreases, going from 0.1 and lifting 0.25 bps to 0.35.
Not only that, but Governor Phillip Lowe has flagged that there will be more than one rate rise this year, stating in the press conference on Tuesday, 03 May, “Given the outlook for the economy and inflation, further normalisation of interest rates will be required.” [1]
The reasoning behind the uplift in the cash rate? Inflation of course, which hit 5.1% year on year. Which is the highest it has been since September 2008. [2]
The positives that came out of the report is that it looks like wages are also steadily increasing, although the wage report has not been released as of yet, Governor Phillip Lowe has released that based on liaising with business associates and gathering data from local companies, the wage growth is definitely there.
What does this mean for everyday people like you and I?
It means we will need to adjust our budget, as mortgage costs will increase along with other cost of living, with inflation continuing to increase.
And it means as inflation has increased, adding on to the fact the employment rate is down to 4.0%, [3] it might also be time to start looking to ask your employer for a wage increase.
Today, I won’t be going through how you can attain a wage increase, however, I will be giving you a few figures to think about for when you do want to add the extra cost on to your bottom line for your budget.
Here are the things you need to ask yourself;
You need to ask, how much more interest will I need to pay? Thanks to the rate rise.
How much can rates increase over the next 12 months? How do I plan for further rate rises (some banks are estimating to see the cash rate at a normalised 2.0% in 12 months time.)
Let’s start with, How much more interest you will need to pay?
Based on the average variable rate of 2.71% [4], as of May 17-22nd, you will see a interest rate increase of 0.25% to 2.96%.
As well as the average home loan in Australia being $599,922 according to the Australian Bureau of Statistics (ABS) in March of 2022. [5]
The average monthly repayments on a $599,992 loan over 30 years will be $2,437 per month, now what happens when interest rates increase by 0.25%?
The interest rate repayments would increase by $80 per month to $2,517 per month, which probably doesn’t seem to bad.
Does your loan work out to be bigger than the average, or smaller? That is ok, lets work out some quick numbers for you;
Home loan size: $300,000
Avg. Var. rate and repayments: 2.71%, $1,219 p.m
New Rate and Repayments: 2.96%, $1,259 p.m ($40 increase)
Home loan size: $400,000
Avg. Var. rate and repayments: 2.71%, $1,625 p.m
New Rate and Repayments: 2.96%, $1,678 p.m ($54 increase)
Home loan size: $500,000
Avg. Var. rate and repayments: 2.71%, $2,031 p.m
New Rate and Repayments: 2.96%, $2,098 p.m ($67 increase)
Home loan size: $700,000
Avg. Var. rate and repayments: 2.71%, $2,843 p.m
New Rate and Repayments: 2.96%, $2,937 p.m ($94 increase)
Want to know what your mortgage repayments will be exactly and how the interest rate will affect it, check out the CommBank repayment calculator.
What about the further rate rises that have been flagged by the Governor himself?
Let’s just assume that the cash rate will increase to 2.0% as the big four banks are assuming over the next 12 months, how much does that add to your costs?
Home loan size: $300,000
New Rate and Repayments: 4.71%, $1,558 p.m ($340 increase)
Home loan size: $400,000
New Rate and Repayments: 4.71%, $2,077 p.m ($453 increase)
Home loan size: $500,000
New Rate and Repayments: 4.71%, $2.597 p.m ($566 increase)
Home loan size: $600,000 (Average Aus home loan)
New Rate and Repayments: 4.71%, $3,116 p.m ($679 increase)
Home loan size: $700,000
New Rate and Repayments: 4.71%, $3,653 p.m ($792 increase)
Let me just let all those numbers sink in…
For the average home owner, you are looking at an increase in mortgage repayments of $679 per month over the next year.
Based on the RBA “normalising” the cash rate, and what the big four banks and the markets are assuming will need to be done to reign inflation in.
What can you do from here?
Now you know the facts, it is time to plan ahead and truly make a difference to your lives now by doubling down on mortgage repayments, maybe you want to reduce the shock of rate increases by simply paying down what you expect to within a years time.
The other thing you could be doing right now is start looking at what you are paying with regards to your variable rate and shop around. See what else is on offer out there, you will be surprised at home many low interest banks there are at the moment, quoting 2.19% and lower.
Just be careful though, as these low interest banks may also increase their interest rates a lot faster than the other banks. It would pay to see whether they follow in line with the cash rate or increase it by more. (Most banks will be increasing their variable rate by the end of May.)
Hopefully the above can give you some idea of where you could be at with regards to mortgage repayments in the future, of course, the above may not come about or it could be worse. So don’t take my word for it, but it pays to be aware of what the changes mean though and to help you re-adjust your budget.
Until next time,
Take Back Control
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