In the last three months, we’ve seen the RBA cash rate go from a record low of just 0.1% to 1.35%. And with more increases expected, it’s easy to see why homeowners and investors are worried about what the future holds for their home loan rate and repayments.
So, why are rates going up now, and what does this mean for your Bluestone home loan? Here are a few of the main things you need to know about the recent rate changes and how they will affect you.
Why are interest rates rising?
The RBA raises interest rates as a way of controlling inflation. Increasing the cost of loan repayments results in tighter budgets, so people spend less and inflation stays under control. At the moment, we’re experiencing high inflation due to a number of factors including COVID-related disruption to supply chains and the war in Ukraine. Raising the rates is intended to curb spending and stabilise the rising costs, which will in turn help our economy stay stronger and prevent businesses being unable to afford to operate.
The cash rate rise in May of this year was the first rise since 2010 – which means that for many borrowers, this is the first interest rate rise they will have experienced since taking out their home loan. The impact on borrowers by the current rate rises depends on whether they have a fixed or a variable rate loan, as well as a few other factors.
If you’re on a variable rate loan, your repayments will increase
For those on a variable home loan, your repayments are likely to increase, but probably not straight away. Most lenders will take some time to decide their next steps before they pass on a rate rise to their customers. Home loan interest rates are determined by a number of factors and while the cash rate is one of them, there are other components your lender will take into consideration.
As well as your lender’s policies, how much more you’ll pay each month will depend on your individual circumstances – whether you’re paying principal and interest or interest-only, the size of your loan, how much you’ve already repaid and how long you have left on your loan term.
If you’re on a fixed-rate loan, your repayments won’t change – yet
A fixed-rate loan is intended to protect borrowers against rate rises, but your fixed rate will only last for a certain amount of time – usually three to five years. Once it is over, you’ll need to pay the higher interest rates, unless you’re able to lock in another fixed-rate term. If your fixed-rate period is due to end soon, now is the time to start thinking about what you want to do, and start budgeting for higher costs if you move to a variable rate.
Rate changes will affect your borrowing capacity
If you’re looking to refinance or buy a second home or investment property, the rate changes will affect how much you’re eligible to borrow. When applying for a home loan, your borrowing capacity will be calculated on the higher interest rate and higher repayments, as well as the likelihood of a future increase. This means you may be able to borrow less than you could before.
A rate rise means the economy is doing well – unemployment is low, spending is high and wages are increasing. The less you have outstanding on your home loan, the less you’re likely to be affected by rate increases, so things like making extra repayments (if you can), and taking advantage of cost-saving features like your offset facility may help mitigate some of the additional costs on your monthly repayments.
What will happen to my Bluestone home loan?
As the reserve bank alters and updates the cash rate there is no doubt a knock on effect across our economy. We do not take interest rate changes lightly and will apply rate changes only when necessary. If there are any changes to your home loan rate you will be contacted via mail in advance. However, please do contact us if you have any concerns or questions.
