Rate hikes could leave mortgage holders stranded with excess interest
While experts agree the RBA is unlikely to increase the cash rate for a while yet, this doesn't mean mortgage holders can rule out an out-of-cycle rate hike.
UBank announced an out-of-cycle move late last week, increasing its 3-year fixed rate from a near market-leading 1.75% to 1.85% (an increase of 10 basis points). Westpac also bumped up its fixed-term rates last Friday.
If a homeowner with the average mortgage of $495,420* experienced a rate hike of 25 basis points from the current average variable rate of 4.27% to 4.52%, they would need to pay an extra $878 per year.
Over the course of a 30-year loan, this would cost them an extra $26,330 in interest.
Finder’s Consumer Sentiment Tracker, a survey of 7,191 mortgage holders, found a monthly raise of $200 or less would cause financial distress for two in five mortgage holders (41%).
Cooke said that while the cash rate isn’t going anywhere, that doesn’t mean home loan rates will stay put.
“The last time the cash rate was held for an extended period of 34 months, banks changed their interest rates on average 7 times – 5 of which were increases."
“It’s important that homeowners factor in potential rate increases when applying for a mortgage – keeping a cushion in your budget can keep your budget from getting dicey down the track,” Cooke said.