Future of Interest Rates and What Does it Mean for Mortgage Holders

As we work our way through January we are seeing the same level of activity that propelled the property market forward through the later parts of 2020 and throughout the entirety of 2021. As is the case with every industry, there are factors that could influence the future direction of prices. Arguably the most important factor when it comes to real estate is interest rates.

The Reserve bank of Australia has continually stated that rates will not change until 2024. With inflation now ramping up much quicker than first anticipated and with runaway property prices around the country, the interest rate debate again is front and centre, especially when discussing real estate.

So what are the latest thoughts on the future of interest rates and what does it mean for mortgage holders ?

Please see below an article written by banking and finance Journalist Sarah Dowling that appeared this week discussing precisely this topic.

Westpac expects first RBA rate hike in August 2022

Westpac chief economist Bill Evans says interest rates will begin rising within months and reach a higher peak than previously forecast.  

In a research note on Thursday, Mr Evans said a faster-than-expected lift in inflation and wages growth had prompted the bank to bring forward its forecasts, with the lender now tipping the first rate hike to occur in August 2022, with a second move just two months later.

“We now expect one hike of 15 basis points in August to be followed by a further hike of 25 basis points in October,” Mr Evans said.

Previously, Westpac had anticipated the first hike would occur in February 2023.

In his last speech of 2021, RBA governor Philip Lowe dismissed speculation that rates could rise this year, saying the conditions needed to warrant a rate hike were “likely to take time.”

Strong jobs data released today showed the unemployment rate dropped to 4.2% in December, the lowest level since mid‑2008.

Key inflation data next week will also be keenly watched ahead of the RBA’s first meeting of the year, after the most recent consumer price index (CPI) data pushed underlying inflation back within the RBA’s 2-3% target range for the first time in six years.

However, PropTrack economist Paul Ryan said he believed the RBA would remain patient.

“I don’t see Westpac’s forecasts for the economy over the next year playing out, and also think the RBA will wait for more sustained inflation and wages growth before moving rates,” Mr Ryan said.

“I remain unconvinced that the RBA will move the cash rate in 2022, despite recent data releases.”

Westpac also updated its forecasts for the path of rate tightening, now expecting the cash rate to peak at 1.75% in early 2024, up from previous estimates of a 1.25% peak by the end of 2024.

The forecasts put Westpac at the front of the pack, with CBA and AMP anticipating the first hike to occur in November 2022, while ANZ and NAB expect 2023.

Here’s a snapshot of what some of the nation’s leading economists are predicting:

Cost of rising interest rates on borrowers

Analysis of Westpac’s updated rate call from RateCity shows the average mortgage holder could see their monthly repayments rise by $103 by the end of this year, and by $427 by March 2024, should the forecast be realised.

The estimates assume a borrower on a variable rate home loan with $500,000 owing on their mortgage.

RateCity research director Sally Tindall said homeowners should begin preparing for higher costs.

“While the exact timing of the next cash rate hike is still not certain, borrowers need to know that rates are on the rise – it’s just a matter of when,” Ms Tindall said.

“Variable borrowers should also check what rate they’re on now, and potentially switch to a more competitive lender or at least ask their bank for a discount. That way, when the cash rate does rise, they’ll at least be coming off a low base.”

Mr Ryan said any moves by the RBA this year would catch many mortgage holders by surprise, given their rhetoric on keeping rates low until at least next year.

“It would leave those with loans having to tighten their spending sooner than expected, and would put a brake on housing price growth by reducing how much households can borrow.”

PropTrack data shows house prices surged by 26.8% nationally over the 12 months to December 2021, while unit prices rose 13.4%, forcing borrowers to take on larger loans to keep up.

In November, the average mortgage size for owner-occupiers hit an all-time high of $596,000 nationally, according to the Australian Bureau of Statistics, with new records set in every state and territory except Western Australia.