Home loan rates: where they are now and where they’re going

2022 has marked the end of an era for ultra-low fixed mortgages as lenders position for higher funding costs. 

That doesn’t mean all rates are on the rise – just yet – as strong competition pushes lenders to slash their variable loan rates.

Borrowers have been told to prepare for higher rates. Picture: Getty.

But with the Reserve Bank of Australia now ruling in the chance of a cash rate hike this year, there are questions around what the trajectory for mortgage rates looks like over the months and years ahead, and whether borrowers should be looking to lock in their home loan rate.

Jump to:

• Where mortgage rates are at
• Where interest rates are heading
• What it means for your hip pocket

Where mortgage rates are at

Fixed loan rates have been on the rise for several months now as the unwinding of key stimulus measures drove up funding cost for lenders.

The end of the RBA’s term funding facility – which offered cheap money for the nation’s banks – marked the turning point for fixed term rates after it was wound up in June 2021.

And with many economists predicting a cash rate hike by August, the hikes have since accelerated.

“We have seen significant movement in rates in the second half of 2021 and this has continued into 2022,” Mr Zammit said.

The latest RBA data shows the average interest rate paid on new fixed-rate loans with a term of three years or less was 2.19% in November 2021, up from May’s record low of 1.95%. Mortgages with a fixed term of more than three years grew to an average 2.7%.

In its statement on monetary policy, released earlier this month, the RBA noted fixed rates for new housing loans have risen sharply since.

But with lending activity still hovering near record levels, many banks have been lowering their variable interest rates to attract new customers.

“These changes have meant that many banks’ cheapest advertised variable rates for home loans are now below their cheapest advertised fixed rates,” the RBA said in its statement on monetary policy.

In November, the average variable loan rate on new owner occupier loans drifted down to an historically low 2.59%.

There is a catch though, with many of the larger discounts limited to ‘basic’ variable-rate mortgages, which don’t include features like offset accounts.

For those who haven’t done a mortgage health check lately, this next chart shows it could be well worth their while.

While the average variable rate for a new customer fell to 2.59% in November, existing variable rate customers are on a rate of 2.98% on average – a difference of 0.39%.

Where interest rates are heading

In his first public appearance of 2022 RBA Governor Philip Lowe conceded the cash rate could begin rising this year, telling borrowers to build up their home loan buffers in preparation of higher mortgage costs.

“Interest rates will go up,” Mr Lowe said, “and the stronger the economy, the better progress on unemployment, the faster and the sooner the increase in interest rates will be.”

“We need to be prepared for that, and people need to have buffers.”

The RBA has ruled in the chance of a 2022 rate hike. Picture: realestate.com.au

Forecasts on the timing and pace of rate hikes vary, however the general consensus among some of the nation’s leading economists is for a rate hike in the second half of 2022.

The Commonwealth Bank is the only big four bank predicting a rate hike by June. Westpac expects the hike to occur by August, followed by ANZ with a September prediction. NAB sees the first rate hike occurring in November.

As for the path of the tightening cycle, predictions vary between economist forecast horizons.

Here’s what the big four banks expect for the cash rate.

Forecasts current at time of publication on 11 February 2022.  

What it means for your hip pocket

So, how could this flow through to mortgage rates?

AMP economists, who also expect the first rate hike in August 2022, have released analysis on the how an eventual cash rate of between 1.5% to 2% would impact mortgage rates.

“We are assuming a rise in the cash rate over the next few years to around 1.5 to 2%,” AMP chief economist Shane Oliver said.

“Which all things being equal will translate to an increase in variable mortgage rates of up to 2%.”

Separate analysis undertaken with the Mortgage Choice home loan repayment calculator shows that could cost households hundreds of extra dollars per month.

Assuming an average existing variable loan rate of 2.98%, a borrower with $500,000 owing on their mortgage could see their repayments rise by $551 per month, should their variable rate increase by 2%. In this calculation, the borrower is an owner occupier paying principal and interest with 25 years remaining on their loan.

Borrowers could see their repayments rise by hundreds of dollars a month. Picture: Getty.

While it’s a big hit for borrowers, PropTrack economist Paul Ryan said the serviceability buffers banks are required to factor into loan applications mean borrowers should be able to withstand higher mortgage costs.

“At the moment someone taking out a loan has to be able to make repayments on that loan at three percentage points above the current rate that they’re paying to receive the loan,” Mr Ryan explained.

“So anyone who took out a mortgage recently should be able to make payments on that loan if interest rates go up by three percentage points, under the same income circumstances.”

In October, the banking regulator APRA increased the minimum interest rate buffer banks must use when assessing a home loan application.

Lenders must now assess whether borrowers would still be able to meet their repayments on an interest rate that is at least 3% higher than their current interest rate, or the ‘floor’ rate set by the bank, whichever is higher.