The magic number your mortgage repayment needs to be at if the RBA raises the cash rate

ELLIE MCLACHLAN
Even though the official cash rate hasn’t moved this month, new research highlights how being prepared now could give you home loan repayment protection when interest rates eventually rise.
Magic number mortgage repayment
What’s the magic number your mortgage repayments need to be at if interest rates rise? Image: artieQ/Shutterstock.com.

The cash rate hasn’t been increased since 2010, meaning most new homeowners haven’t ever experienced an interest rate hike on their home loan, at least not one caused by a cash rate change.

And it won’t be going up this month either, with the Reserve Bank deciding at its meeting today to keep the official interest rate on hold in August.

But rates will inevitably go up again, as the RBA has signalled it may increase the cash rate from 2024, at the earliest.

Economists from ANZ, Commonwealth Bank and Westpac have earlier views of the timing of a hike, and expect the cash rate could be increased by 0.25 percentage points three times.

Taking that into consideration, Canstar research analysts crunched the numbers to determine the magic number your monthly mortgage repayments would need to be at now to provide a buffer and some protection from bill shock when interest rates rise.

In this hypothetical scenario, a person who had entered into a 30-year loan with the average variable interest rate of 3.14% (according to our database) at the start of August would need a constant monthly repayment as below in order to ensure their repayment would not increase with the cash rate.

So, a person with a $300,000 loan in this scenario would need to increase their minimum monthly repayments by $98 – from $1,288 to $1,386 – to feel no impact on their repayments when interest rates rise.

Loan size Starting
minimum
repayment
Required
monthly
repayment
$300,000 $1,288 $1,386
$500,000 $2,146 $2,310
$750,000 $3,219 $3,465
$1,000,000 $4,292 $4,620

Source: www.canstar.com.au. Prepared on 2 August, 2021. Based on a 30-year loan with the average variable rate of 3.14% on our database, entered into at the start of August 2021. The loan has an amount as specified above, and is repaid using principal and interest repayments. The interest rate of the loan is assumed to increase with the assumed cash rate hikes (0.25% at the end of the first three quarters of 2024). The required monthly repayment is the one which ensures the minimum required repayment will not increase above the repayment when the interest rate increases. This analysis, cash rate increase assumptions and outcomes are for illustrative purposes only.

Canstar money expert Effie Zahos said there’s a very real chance mortgage rates could move around 2024 as the RBA has indicated, even though rates are still low at the moment and could be so for an extended period due to the impact of lockdowns on the economy.

Given the outlook in a few years time, she said now was the ideal moment for homeowners to create a buffer.

“If you’re gainfully employed, there’s probably very little pain in changing your repayments to these magic numbers to prevent from feeling the pain later on,” Ms Zahos said.

“Right now, many of us are finding that we are saving more money during lockdowns. There is no better place right now to put your savings with low risk than rediverting the money into your mortgage to cushion yourself for the rate hikes coming.

“Yes, you’d probably get better returns by investing in the sharemarket, but this is a guaranteed rate of return right now.”

She said if borrowers haven’t locked into a fixed rate loan with a record low rate, this could be the next best option to give some guaranteed repayment protection.

“If you’re in a situation where you can’t increase your repayments, keeping your cash reserves in an offset account or a redraw will help provide some type of buffer,” Ms Zahos said. “When your situation goes back to normal or your income levels stabilise again, make your home loan a priority.”

There are 181 home loan interest rates below 2% on Canstar’s database, 161 of which are fixed and 20 are variable.

The lowest variable rate on our database, based on $500,000 loan for owner-occupiers paying principal and interest, is currently 1.77% (1.86% comparison rate) for 60% loan-to-value (LVR) or 1.88% (1.97% comparison rate) for 80% LVR.

The lowest fixed rate for owner-occupiers paying principal and interest is 1.69% (3.49% comparison rate) for one-year fixed.


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This content was reviewed by Sub Editor Jacqueline Belesky as part of our fact-checking process.


Ellie McLachlan is responsible for leading and breaking financial news on home loans, savings and much more. Ellie studied a Bachelor of Journalism and Arts at UQ and has worked at major metropolitan and regional news organisations.

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