How are rising interest rates affecting mortgages?

Highlights

• Inflation is expected to rise higher than expected earlier, as a result of which interest rates are likely to increase at a higher and faster pace in upcoming months.
• Housing prices in some states have fallen in the last couple of months. However, they are more than 25% higher than pre-pandemic rates.
• People making mortgage repayments should relook at their finances and strategies for instalments, according to renewed interest rates and speculations for the near future. 

Inflation is at record levels in Australia. Global supply chain woes, the COVID-19 pandemic, the Russia-Ukraine conflict, Australian floods and many other significant factors have led to a tremendous rise in prices of goods and services across the country.

In order to combat the mounting inflation, the Reserve Bank of Australia (RBA) recently lifted the fixed cash rate in the country by 50 basis points to 1.35%. Increase in interest rates is a technique adapted by federal banks to limit cash flow in an economy so that demand falls and, as a result, the price level also falls to help the market reach the economic equilibrium.

The Australian central bank has increased the national interest rate thrice this year so far. Amidst already increasing prices, people speculate how a further increase in the interest rate will affect their mortgages. Let’s cast a glance at some important factors of the development.

How are rising interest rates affecting mortgages?

After 2010, the RBA increased the rate for the first time from 0.1% to 0.35% in May 2022. In June, the rate was lifted to 0.85%, which has now been raised to 1.35%. According to economists, this rate hike is expected to increase monthly repayments by AU$119 for an Aussie mortgage on a home of AU$450,000. 

However, that is not the end. According to various economists, inflation is expected to rise higher than expected earlier. So, naturally, the interest rate will likely increase at a higher and faster pace in upcoming months.

To talk about the effect of the increase in the interest rate: housing prices in some states have fallen in the last couple of months. However, they are mostly more than 25% higher than pre-pandemic rates.

Source: © Iqoncept | Megapixl.com

A glance at the outlook

Accordingly, to manage the rate of inflation, mortgage repayments are going to be increased in upcoming months. Economists suggest that in recent months, mortgage repayments will still be sustainable. However, it may get more challenging as we move towards the end of 2022 and enter 2023.

Thus, it is recommended that people making mortgage repayments should relook at their finances and strategies for instalments, according to renewed interest rates and speculations for the near future. Additionally, it is not guaranteed that a consistent rise in interest rates may substantially decrease prices of essentials because many global factors also play a crucial role here.