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How High Will Interest Rates Rise?

Written by Aaron Alston

Hudson had the opportunity to recently attend an Economic Indicators Conference held in Brisbane on the 4th February.  Paul Bloxham, Chief Economist at HSBC was the key speaker.  There was also a panel discussion following Paul’s update which included figures such as: Ross Israel, Head of Global Infrastructure at QIC, Leigh Warner, National Director of Research at JLL and Josephine Sukkar AM, Principal at Buildcorp.

At the last event, Paul Bloxham provided numerous insights into what 2021 would hold.  The key discussion at that time was what would happen should the virus mutate and how new strains would impact the economy.  The questions on everyone’s lips which was addressed at the 2022 conference: how high will interest rates rise and what will happen to property prices?

My key takeaways from the economic conference specifically relating to property prices and interest rates were below:

  • Australia has experienced an increase in property prices of 25% nationally.
  • Housing market expected to cool to single digits in 2022 (5-9%).
  • No reason to expect property prices to decrease short term.
  • Economy in recovery phase with a slow first quarter, however expected to pick up as we continue through 2022. Through the pandemic there has been strong demand with increase demand in durable goods (i.e cars).  Shipping constraints has increased the price of goods available.  Demand for goods will start to shift towards demand for services as Australia navigate through living with COVID and we are able to travel more etc.
  • Savings rates increased through pandemic which will lead to increase in service consumption through 2022.
  • RBA have suggested rate rises are plausible in 2022 (changed tune from initial 2024 prediction).
  • HSBC predicts cash rate to increase 1% by end of 2023 (may change though). Leigh Warner believes the economy can absorb a 1% rate rise.
  • Key focus areas in future: Education, Migration, Climate Change.

The cash rate is currently sitting at 0.10%.  A link to the following ABC article (https://www.abc.net.au/news/2022-01-20/westpac-forecasts-rba-rate-rise-by-august/100770574#:~:text=Westpac%20expects%20rate%20rises%20to,a%20month%20by%20March%202024 )states that Westpac suggest rates may rise an early as August 2022 and the cash rate could increase to 1.75% by 2024.

I think we can all agree that rates are not going to stay this low forever and it’s only a matter of time before they increase.  So, what does this mean if you have a home loan?

Example 1 – Home Loan at $500,000 over 30 years

Home Loan $500,000 $500,000 $500,000
Interest Rate 2.5% 3.5% 4.5%
Repayments $456 p/w $519 p/w $585 p/w

1% rise – An extra $63 p/w

2% rise – An extra $129 p/w

Example 2 – Home Loan at $750,000 over 30 years

Home Loan $750,000 $750,000 $750,000
Interest Rate 2.5% 3.5% 4.5%
Repayments $684 p/w $778 p/w $877 p/w

1% rise – An extra $94 p/w

2% rise – An extra $193 p/w

Example 3 – Home Loan at $1,000,000 over 30 years

Home Loan $1,000,000 $1,000,000 $1,000,000
Interest Rate 2.5% 3.5% 4.5%
Repayments $912 p/w $1,037 p/w $1,170 p/w

1% rise – An extra $125 p/w

2% rise – An extra $258 p/w

Source – https://www.commbank.com.au/digital/home-buying/calculator/home-loan-repayments

Summary

  • Interest rates will increase in the future which will lead to the property market cooling and making it harder to borrow.
  • A 1-2% rate increase is expected over the next 12-24 months (this could change depending on various factors so keep well informed).
  • If you haven’t reviewed your home loan recently, now is the time to do so.
  • If you would like to review your home loan, contact our team at Hudson and we can put you in touch with a Finance specialist.

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