Anyone who has a home loan in Australia generally keeps an eye on the current interest rates. Unlike some other loans, the majority of home loans are loans offered with a variable interest rate, which is why it’s wise to keep an eye on what the interest rates are doing from month to month.
Let’s take a look at what happens to a home loan if interest rates rise and fall. Does it have much of an impact? Let’s find out.
How Home Loan Interest Rates Work
While all lenders vary and offer different rates of interest on their home loans, whether interest rates will go up, down or remain the same for a period of time is somewhat dependent on the RBA, or Reserve Bank of Australia. If the RBA decides to increase interest rates, invariably most mortgage lenders will also increase the rates of interest on both current loans and any new loans.
Keep in mind that the interest rates decisions put forth by the RBA are really guidance only. Banks and other lenders are not obligated to follow the guidance of the Reserve Bank, but generally, most lenders do follow what the RBA suggests, on average. In most cases, it’s ultimately up to the lender whether they decide to raise interest rates, lower them or keep them the same.
What Is the Impact of High Interest Rates?
For variable home loans, if the Reserve Bank decides on an interest rate increase and your lender decides to mirror the advice of the RBA and increases the interest rate on your home loan, the amount of your monthly mortgage repayment will increase due to the extra interest added to your loan.
This is why you’ll always want to keep tabs on what the Reserve Bank is considering, as well as your specific home loan provider. If your interest rates are about to go up, you’ll want to know by how much and be prepared to budget for a higher monthly repayment, at least for a time. How much of an increase you’ll have to cover depends on the terms of your home loan and what the interest rate increase is.
Interest rate hikes don’t only affect home loans, but can also affect the rates on other types of variable loans as well, such as personal loans and credit cards. Anyone who has a home loan or some other form of finance would be well advised to keep a keen eye on interest rates.
On the flip side, if interest rates go down and your lender follows through, you’ll enjoy reduced monthly repayments, putting more money in your pocket. You also have the option of paying more than the minimum monthly repayment, if you wish to try and pay out your home loan sooner. Likewise, individuals with variable rate personal loans may also enjoy a reduced rate of interest for a time.
Are There Any Advantages of High Interest Rates?
While having to pay more money on your loan when interest rates increase is generally seen as a negative, there are some positives that come along with an interest rate increase.
One such positive is that lenders tend to loosen their purse strings a little when interest rates are higher and are therefore more open to lending money; particularly to first-time borrowers. If you’re in the market for a home loan or some other type of loan, your chances of being approved are usually improved when interest rates go up. Talk to any home loan finance company during a period of higher interest rates and you’ll generally find they are more receptive to the idea of lending money.
Often, the Australian dollar will strengthen against other currencies when interest rates go up, so that can also be a positive.
People with savings tend to benefit from an interest rate rise as well, as it can lead to things like higher interest paid on term deposits and so on.
The Wrap
Whether interest rates increase or decrease, there are positives and negatives on both sides of the equation. If you currently have a home loan or are thinking about buying a home, always take notice of the latest interest rates and whether the Reserve Bank is considering a change in interest rates, either up or down, in the near future.