What do interest rate rises in Australia mean for home loans?

two men talking about the rising interest rates in Australia

 Estimated read time: 4 Minutes

Whether you already have a home loan or are looking to become a first-time homeowner, you’re probably keeping a close eye on interest rate rises in Australia. Here’s some more information.

In May 2022, the Reserve Bank of Australia (RBA) raised the cash interest rate to 0.35%. That was the first interest rate increase since 20101. But it was just the beginning. Twelve more raises have followed, the last in November 2023, when rates paused at 4.35%. That pause has extended through to the new year in 2024, providing homeowners some relief. But there is still uncertainty around the outlook of home loan interest rates.

So why does this matter for you? 

The RBA cash rate plays a direct role in home loan interest rates – and if you’re one of the many Aussies struggling with higher repayments, you’re not alone. But while these rises have not done homeowners and prospective buyers any favours, higher rates don’t have to spell the end of your home ownership dreams. Read on to learn more about what’s happening with interest rates across Australia – and see what you can do to potentially make it easier to manage your monthly repayments. 

What is the average home loan interest rate in Australia?

The average home loan interest rate in Australia varies depending on which type of home loan – fixed or variable – you have. It also depends whether you are an owner-occupier or investor, and if you’re paying interest-only or principal and interest.

The average variable home loan interest rate as of the end of July, when the RBA paused the interest rate at 4.10%, is 6.67% for owner-occupiers paying principal and interest.

The average fixed interest home loan rate depends on the duration of your fixed interest term – this can be as little as one up to five years. 

1 year
6.39%
2 years
6.33%
3 years
6.23%
4 years
6.43%
5 years
6.44%

Source: Canstar - What are the average interest rates on home loans 2

 

Why do interest rates rise?

One important thing to know about understanding home loan interest rates is that they can rise due to a range of economic factors. These can include overall supply and demand for credit and the rate of inflation.

According to the RBA, the Australian interest rate rises of the past couple years are an effort to help balance supply and demand in the economy3. This supply and demand are what cause inflation, and raising the interest rate is one way for the RBA to bring inflation back down. By raising interest rates, everyday Aussies will have less money to spend on other goods and services. The idea is that businesses will then have to lower their prices to be more competitive, bringing inflation down.

 

What do rising interest rates mean for home buyers?

Rising interest rates mean higher home loan repayments.

The RBA interest rate on cash has a direct impact on various types of loans – with the biggest impact generally felt by those with variable home loans. As the cash interest rate goes up, so, too, will the interest rate on home loans.

If you took out a variable home loan to buy a property in the months leading up to the initial May 2022 interest rate rise, you may be feeling the pinch the most with a higher interest rate on a higher loan balance. But there are some steps you can take that may help manage your finances, like refinancing

 

What happens to home prices when interest rates rise?

As home loans become more expensive thanks to higher interest rates, typically fewer people are in position or want to take on increased monthly payments. Like inflation, this could cause property sellers to decrease asking prices to be competitive. Fewer buyers can also mean less competition at auction time.

home loan interest rate

The home loan interest rate forecast in Australia

While the pause on rising interest rates from July to October 2023 was certainly welcome news, there’s still little-to-no signs of interest rates falling back down to the lows of years past, with the November 2023 increase an example of this volatility.

The RBA’s targeted inflation rate is 2-3%. Unfortunately, the inflation rate in the first quarter of the 2023-24 financial year was 7%. As long as inflation stays that high, there’s little reason to think the RBA will lower interest rates.

When will interest rates go down?

A stagnant or even further-increasing cash interest rate means that home loan interest rates might not go down for a while.

That being said, nothing is for certain. Some experts4 believe interest rates will start declining in 2024. Others think it will be at least 2025 before we see rates start to decrease. 

Rising interest rates can be daunting for homeowners and those looking to buy property. Regardless of which camp you fall in, you’re not alone. 

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