These record-low interest rates we’ve been enjoying since late 2020 might increase soon. That’s why now might be the perfect time for you to refinance your current home loan and lock in a cheap fixed rate.

You might recall that in November 2020, in response to the pandemic, the Reserve Bank of Australia (RBA) reduced the cash rate to a record-low 0.10%, with banks then lowering their mortgage rates to record-low levels. However, the RBA has said repeatedly that, at some point, it will start increasing the cash rate, to return it to more ‘normal’ levels. When that happens, banks will respond by increasing their home loan rates.

In recent weeks, speculation has mounted that the RBA will start increasing the cash rate sooner rather than later. Commonwealth Bank, for example, thinks the first increase will occur in June, and that the cash rate will reach 1.25% by March 2023. ANZ expects the cash rate to reach 2.00% by the end of 2023.

With the market already pricing in future rate rises, banks’ funding costs have increased. As a result, Commonwealth Bank, Westpac, ANZ and NAB all increased their fixed interest rates in February, on top of earlier increases over the previous months.

What does all this mean for your mortgage?

If Commonwealth Bank is right, your home loan interest rate might increase by 1.15 percentage points in the next year or so. If ANZ is right, it might increase by 1.90 percentage points within a couple of years.

Let’s imagine you have 25 years left on your mortgage, $750,000 left to pay and you’re being charged a variable interest rate of 2.50%. In that case, your monthly repayments would be $3,365. But if interest rates increase, your monthly repayments would rise to:

• Interest rate of 3.65% = monthly repayments of $3,825

• Interest rate of 4.40% = monthly repayments of $4,126

How to respond to this environment of rising interest rates

Just because interest rates look set to increase, doesn’t mean you have to take it lying down.

If you have a variable-rate loan, you could refinance to a new, fixed-rate loan. Depending on your circumstances, you might be able to lock in a fixed rate with a ‘2’ in front of it.

Alternatively, you could refinance to another variable loan, because lenders are competing hard for new business, with some offering owner-occupied variable rates under 2%. Of course, that variable rate would probably increase once the RBA started increasing the cash rate. But at least your increase would begin from a lower starting point.

You might be tempted to postpone refinancing until the RBA starts lifting rates. But that might be a costly mistake. Because once interest rates start increasing, so will your borrowing costs; as a result, banks might reduce the amount of money they're willing to lend you. So if you tried to refinance the hypothetical $750,000 loan mentioned above, you might find your new borrowing capacity is, say, only $700,000, making it impossible for you to refinance. 

That's why it's vital you partner with a Sydney finance broker who will take a strategic view of your financial position and, potentially, help you refinance now to a better loan.

Looking for one of the best brokers in Sydney? Eventus Financial is a multi-award-winning mortgage broker with over 300 five-star Google reviews. Schedule a no-obligation consultation with Alex to find out how we can help you with your home loan.