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  • Writer's pictureCOMPASS

Beware of Rising Interest Rates

Since the (GFC) Global Financial Crisis in 2007 home loan interest rates have basically been falling. 15 years is a long time and has allowed borrowers to become relaxed and complacent about this. Over that time it is well documented that there has been virtually zero average wage rises in Australia. However, home values have increased considerably and average home loans have had to rise to accommodate for that increase.

Now we know that fixed home loan rates have now been on the rise for the last 3 months, and there is increasing pressure on variable home loan rates from inflation and wage pressures. So here’s an illustration of why all borrowers need to be very wary of the interest rate environment ahead of us. I’ve turned back in time to say 1988/89 to demonstrate this :-

1989 2022

Typical loan $100k $500k

Interest rate est. 16% 2%

Loan term 30 years 30 years

Monthly payment $1,345 $1,849

Interest rates increase by 2% and this is what happens

1989 2022

Typical loan $100k $500k

Interest rate est. 18% 4%

Loan term 30 years 30 years

Monthly payment $1,508 $2,388

You can see by the above that a 2% increase on a $100k loan equates to a monthly loan payment increase of $163. However, a 2% increase on a 500k loan equates to $539 per month in extra payments! Therein lies the problem. Hopefully many borrowers gained some protection back in 2021 by fixing their interest rates when rates had reached a bottom in that cycle, but coming off that fixed rate in say 2023 – 2025 will quite possibly mean a ‘painful’ experience. Even more so now, budgets and cash flows need to be carefully monitored.

Give Michael a call on 02 6583 2211 if you have any questions.

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