Home loan guide / Home loans explained

How a rate rise could affect you

4 min read

Bailey Underwood

A rise in home loan interest rates often translates into higher repayments for home loan repayers. While it might be a hit to your budget, there are still ways to save.

What goes up must come down…right? With home loan interest rates, it’s hard to truly predict where they may go next. When they fall, it’s usually good news for home owners’ back pockets. But, when they rise, it can have the opposite effect.

Increased rates, increased repayments

When banks and lenders adjust their variable home loan rates up for their customers, this increases the amount of interest payable on the home loan. When more interest is due, the overall repayments for a home loan will rise as well, to cover the cost of the increased interest. This is true for any home owner with a variable home loan rate.

In an economic environment where a lender is implementing a home loan rate rise, you’ll need to expect a increase in your costs and adjust your household budget accordingly.

If you chose a fixed home loan rate, you may have been predicting that home loan interest rates would rise. When your home loan interest rate is fixed, you won’t be immediately impacted by any change to interest rates; your home loan rate is locked and unchangeable for the period that you agreed.

How lenders set their interest rates

It’s important to understand why interest rates may move. It’s not necessarily the lender being opportunistic and raising rates for the fun of it. There are two main market factors which can determine how banks and lenders set their interest rate.

The first is the Official Cash Rate, set by the Reserve Bank of Australia (RBA). This is the rate at which banks exchange money with each other in the ‘overnight market’.

The second is the Bank Bill Swap Rate (BBSW), set by market forces. This is the rate at which banks exchange money with each other in the ‘wholesale market’.

In simplistic terms, changes to either of these rates can put financial pressure on banks and lenders which they often pass to their customers. You can learn more about how banks and lenders set their interest rates.

Unfortunately, no one is immune to these market forces, and they can have far-reaching flow-on effects in the broader economy. The RBA, for example, has traditionally increased the Official Cash Rate in order to arrest rising inflation throughout the Australian economy and to keep it within a sustainable band. This action in the short-to-medium term can result in the double whammy of higher home loan interest rates at the same time as increased cost of living pressures.

Ways to save

After a home loan rate increase, it might be time to tighten your budget belt. Thankfully, there are a few ways you could save money when looking to offset the cost of your new home loan repayments.

Switch and save

If you weren’t already on a competitive home loan interest rate, now could be the time to consider refinancing to a lower cost lender. Do your research to assess which banks and lenders are offering the best deal. Some things to weigh up are the interest rate itself, the comparison rate, any upfront or hidden fees, and whether the loan comes with the features you’re after, like an offset account or a redraw facility.

You can also use a refinance calculator or a repayments calculator to find out exactly how much you could save by refinancing to a more competitive home loan interest rate.

Consider variable and fixed home loans

If you’re on a variable home loan rate, or you’re on a fixed home loan rate which is due to expire and turn into a variable rate, it could be time to consider a fixed rate home loan.

Fixed home loan rates can give certainty of repayments during turbulent times. If you’re able to time it right, you can also benefit by securing a lower fixed rate while variable rates continue to rise. If you are expecting more home loan rate rises, and you can find a suitable fixed rate deal, fixing could be worth considering. The downsides of fixed home loan rates are the lack of flexibility, the high break costs of leaving the loan, and often having a limit on the amount of additional repayments which can be made.

Even if you fix, there’s no guarantee interest rates will continue to rise, and you could end up paying more when compared to a variable home loan rate. Such is the risk of choosing a fixed or a variable home loan.

Consider an Offset account

An offset account can be a handy way to park funds while also reducing the amount of interest payable on a home loan. Perhaps you’re saving for a holiday or a renovation and have a lump sum of cash stowed away. By holding the cash in a offset account, it will ‘offset’ the payable interest by the same amount in the offset account. The downside is that it costs extra for this feature – the cost is usually a flat monthly fee, or a slight increase in interest rate.

For $10 per month, Tic:Toc’s offset account is available with our fixed rate products, too. Ultimate flexibility!

Hack away at your budget

Cancelling a streaming service you never use is a cathartic exercise in budget streamlining. Reviewing your household budget? Take the feeling and multiply it by ten.

If it’s been a while since you took stock of your spending and savings, a rate rise could be the perfect excuse to run the numbers and trim the fat.

Look at utilities, insurance, and transport costs, as well as credit cards, ongoing subscriptions, and your shopping trolley. Read more savings hacks with our tips for optimising your savings goals.

Common questions about rate rises

What does a rise in interest rates mean?

In a nutshell: if you have a variable home loan rate, it may be increasing. Your home loan repayments may increase as a result.

What happens when inflation rises?

When inflation rises, the cost of goods and services typically rise too. Consumer purchasing power may decrease, and if this happens at a faster rate than wages growth, people may find it more difficult to afford what they used to.

Because people expect higher inflation (and higher costs), they might make purchases sooner. Return on investment could be lower due to inflation eroding the real value of money and therefore the real return on investment. Businesses may change prices at a more rapid pace, which can cause uncertainty among consumers.

The RBA, who are tasked with controlling inflation, have a great explanation of their inflation target and what occurs when inflation is too high.

Are interest rates going up in 2022?

It’s impossible to say with certainty where interest rates may head. As of publication, the RBA have raised the Official Cash Rate three times in 2022. Once by .25%, then twice by .50%. Some speculate that further rises could come.

In sum

While a home loan rate rise won’t be great for your back pocket, there are still ways to save money. Consider and research whether refinancing, fixing your home loan, or getting an offset account would be suitable for you. And remember that while interest rates can rise, they can also fall!

Looking for more home loan explainers? Check out our Home Loan Guide for more. Have more questions? Get in touch.

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