Are interest rates set to rise in 2022?

With 2022 well underway, homeowners and homebuyers alike may be wondering whether home loan interest rates are set to rise this year.

The onset of the COVID-19 pandemic caused interest rates to drop in 2020 and 2021. With the Australian economy back on the rise, you may see interest rates start to increase as a result.

While we can’t provide solid data on the future of interest rate fluctuations, we can provide some predictions. Find out how likely it is that interest rates will rise, how you can prepare for incoming changes and whether fixing your interest rate is a good idea.

• Related: Tips for securing a low interest rate in 2022
• Related: How to prepare for an interest rate increase

Will interest rates rise in 2022?

While we don’t know for sure what will happen in the future, interest rates are predicted to rise this year. However, any changes are expected to be marginal.

Based on rising fixed interest rates over the past few months, this is expected to come as a result of Australia’s recovering economy. While interest rates offered by lenders have historically been affected by the Reserve Bank of Australia (RBA) and the official cash rate (OCR), lenders are free to increase or decrease interest rates as they choose.

It’s expected that borrowers will likely find interest rates rising above 2% in 2022, but changes will be steady and gradual.

If you’re worried about how this might affect your home loan repayments, speak to a Home Loan Specialist. We’ll be able to help with any concerns you might have and give you the confidence to take charge of your home loan.

Will there be a cash rate hike in 2022?

The RBA is in charge of setting the official cash rate (OCR). This has a flow-on effect on the cost of funding for banks and therefore all financial products. These include savings accounts, personal loans and of course, home loans.

The RBA's main objective is to support the Australian economy. That means economic stability, growing wages, high employment rates and steady inflation. And while our economy is slowly on the mend, we likely won’t see an official cash rate hike from the RBA until the first half of 2023.

Why are interest rates rising?

Interest rates fluctuate for a number of reasons. They are expected to rise this year due to:

• A recovering economy: the Australian economy has started to recover and stabilise following the COVID-19 pandemic
• An expected cash rate hike: while it’s expected the OCR won’t increase until the first half of 2023, you can expect interest rates will follow suit
• Growing businesses: the rising costs of growing business operations have led some lenders to increase their interest rates
• The end of the Term Funding Facility (TFF): the TFF was introduced by the RBA in March 2020 to support the Australian economy in response to COVID-19. This package provided low-cost funding to banks, allowing them to offer lower interest rates. The TFF ended in June 2021 so the cost of funding for banks has increased as a result.

How can you prepare for rising interest rates?

It may be a little nerve-racking for homeowners and investors knowing interest rates may steadily rise this year. But there are several things you can do to prepare and put yourself in a stronger financial position to pay off your home loan.

For example, consider if you could:

• Cut back on unnecessary spending: review your monthly expenses and cut back on unused services and subscriptions. For example, you might consider cancelling a TV streaming service or magazine subscription you no longer use
• Make extra repayments on your home loan: if your budget allows, make additional repayments on the principal of your home loan. This will reduce the amount owing on your home loan and subsequently, the interest charged on your principal
• Make more frequent repayments on your home loan: did you know if you switched from monthly to fortnightly repayments, you could pay off your home loan sooner? This is because there are 12 calendar months per year, but 26 fortnights in a year. That’s an additional month’s worth of repayments per year
• Refinance to a lower interest rate: you could save thousands of dollars in interest on a marginally lower interest rate. Make sure your current interest rate is comparable to those on the market. Find out how much you could save by using our free interest rate calculator
• Consolidate your debts: consolidating your unsecured debts, like credit cards, car loans and personal loans will allow you to make one combined monthly repayment on a lower-interest loan. Home loans generally have much lower interest rates than unsecured debts. Find out how much you could save on a consolidated debt loan by using our free debt consolidation calculator
• Reduce your interest using an offset account: an offset account is a type of savings or transaction account directly linked to your home loan. It is designed to help you reduce the interest charged on your principal. For example, if you have a $400,000 home loan and $50,000 in your offset account, you’ll only be charged interest on $350,000. Find out how much you could save on interest through your offset account by using our free offset calculator
• Create a budget that works for you: reviewing your income and expenses and creating a budget can help you get more in control of your finances. Having clear visibility on your spending and debts can help you better budget for and manage your home loan repayments.

How can you avoid interest rate increases?

If you want to avoid being affected by rising interest rates, it might be worth looking into a fixed interest home loan.

Fixed interest home loans allow you to ‘freeze’ your interest rate for a certain amount of time (usually 1-5 years). Because of this, your interest rate won’t be affected by any rate fluctuations during your fixed term.

It’s important to note that fixed interest home loans don’t provide the same flexibility as variable rate home loans. For example, they usually don’t allow you to make extra repayments on your home loan without incurring a break fee. They also may not offer features like a redraw facility or offset account.

Also keep in mind that fixed rate home loans lock in an interest rate for a specified period, meaning you won’t benefit if interest rates decrease.

If you have any questions or concerns about predicted interest rate increases this year, speak to a Home Loan Specialist at a time that suits you.

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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.