Back to Inspire Home


How high could interest rates increase in 2022?

By ,| 5 min read

A big question on many homeowners’ minds this year is ‘how high will interest rates rise?’

If you have a home loan, it's natural to wonder how high your repayments could climb and if you should consider fixing your rate to avoid future rate hikes.

While there’s no guaranteeing what will happen, there are a few predictions on how the cash rate might progress. We cover these predictions, how to prepare for rate rises, and how the cash rate rises will affect borrowing power and house affordability.

How high will home loan interest rates climb?

Several predictions on how high the cash rate will climb have been floating around as Aussies expect further cash rate hikes to occur this year.

In May, the cash rate increased for the first time in over 11 years to 0.35%, up 25 basis points from a record low 0.1%. It lifted again in June, increasing by 50 basis points to 0.85%.

Historically, we’ve seen the cash rate rise and fall by 0.25% increments, so it’s expected that home loan interest rates will rise by the same amount.

One source says the cash rate will likely go as high as 1% by the end of 2022, increasing a further 0.5% to 1.5% by mid-2023.

Another source expects the cash rate to reach 2.5% in the Reserve Bank of Australia’s (RBA) attempt to curb rising inflation. But, a time frame has not been laid out.

It says that Philip Lowe has estimated an official cash rate (OCR) at this level would represent a ‘neutral’ cash rate in Australia. A neutral cash rate is one that no longer stimulates the economy or boosts inflation but also does not put a halt on economic growth.

With inflation reaching 5.1% in March, it’s expected we’ll finish off the year with an inflation rate of 5.9%, almost double the expected wages growth of 3%. This means households will likely experience an estimated 2.9% decline in purchasing power.

This outlook is not all bad for prospective home buyers who may be intimidated by rising rates. The RBA has said that if the cash rate were to hit 2.5%, dwelling prices would likely fall by 15%.

How could cash rate increases affect home loan repayments?

If the cash rate continues to climb, it’s highly likely that home loan interest rates, as well as interest rates on other loan products, will rise as well.

Banks and lenders can set their rates independently from the cash rate. But, because the cash rate affects how much interest banks have to pay on overnight borrowing, they will typically:

  • Increase their interest rates with cash rate increases so they can pass on the additional costs of borrowing to their customers
  • Decrease their interest rates with cash rate decreases to stay competitive with their offerings on the market.

How could repayments be impacted?

Wondering how home loan repayments could be impacted by rate rises? Let’s look at an example of an owner-occupier P&I loan over a 30 year loan term.

Here’s how monthly repayments could increase as a result of 0.5% incremental increases.

Loan amountInterest rateMonthly repayment

Could you get a lower home loan rate?

Compare 25+ major Australian banks in seconds.

Compare rates now

If you have a fixed rate home loan, you won’t be affected by any fluctuations in your lender’s interest rate until the end of your fixed term. When this period ends, you’ll likely revert to your lender’s standard variable rate.

If you have a variable rate home loan, your home loan repayments will be affected if your lender decides to pass rate increases on to you.

If you have a split rate home loan, only the variable portion of your loan will be affected by interest rate changes.

How will interest rate increases impact house prices?

Aussies saw house prices shoot up when the cash rate dropped to 0.1% in November 2020.

According to the RBA, household consumption dropped 12% in the June quarter of 2020 following the onset of COVID-19.

The RBA sets the cash rate each month to support steady economic growth. Due to the lull in spending at the start of the pandemic, they dropped the cash rate to 10 basis points to stimulate the Australian economy and encourage household spending.

As a result, the cost of borrowing money decreased, which meant more people could afford to take out bigger home loans. Growing demand eventually outweighed housing supply, which meant dwelling prices could grow.

So, as interest rates start rising, we can expect the opposite to happen.

As the cost of borrowing money increases, fewer people will be able to afford a mortgage as their borrowing power dwindles.

We’ve already started to see dwelling prices in Sydney and Melbourne drop off as housing affordability reaches an all-time low.

In May, the CoreLogic home value index recorded its first decline in house prices since September 2020 to 0.1%, with Sydney dropping 1% and Melbourne 0.7%.

How will interest rate increases impact borrowing power?

Borrowing power, also called ‘borrowing capacity’, is the amount of money you’ll likely be able to borrow from a lender for a home loan.

Your borrowing power is based on several factors, including:

  • Your income and assets
  • Your expenses and debts
  • Your credit history and credit score
  • The type of loan, loan term and interest rate
  • The size of your home loan deposit
  • The value of the property you’d like to purchase.

Wondering how much you could borrow?

Calculate your borrowing power based on your income.

Calculate now

Higher interest rates mean higher costs for borrowing money. If the cash rate stays on the same upward trend, people could expect their borrowing power to decrease further.

Stricter lending policies and tougher serviceability tests for home loans mean that lenders are required to ‘stress test’ home loans. This tests to see if borrowers would still be able to afford their home loan if interest rates rose by 3%.

So, the combination of higher interest rates, stricter serviceability tests and lower borrowing capacity means that some borrowers may find it more difficult to take on a mortgage.

How can you prepare for higher mortgage repayments?

Borrowers can expect the cash rate to increase further in the coming months, following the first cash rate hike in over 11 years in May.

There are several things you can do to avoid mortgage stress and better prepare for increasing home loan repayments, including:

  • Reviewing your budget and cutting unnecessary spending e.g. eating out less or switching your gas and electricity provider for lower rates
  • Refinancing to a home loan with low or zero fees
  • Taking advantage of refinance cashback offers
  • Creating an offset account to reduce the amount you pay in home loan interest
  • Completing a Home Loan Health Check™ to ensure you still have a home loan deal that works for your needs
  • Consolidating your debt, clearing any existing debt if possible and avoiding taking out other loans
  • Asking your lender for a lower rate and possibly switching lenders if your current lender is no longer offering a competitive rate.

How can you prevent your mortgage repayments from increasing?

Having steady repayments may be a priority for some borrowers. If this is true for you, you might want to look into fixing your interest rate.

Fixed interest rate home loans allow you to lock in a rate for a specified period of time (usually 1-5 years). This means that over the fixed period, your home loan repayments will remain the same, regardless of changes to the cash rate or your lender’s interest rates.

While fixed rates on offer are typically higher than variable rates, it can be difficult to predict how high interest rates will rise in the coming months and years.

If you’re thinking about fixing your rate, reviewing your loan options or just want home loan help, book a time to chat with an expert.

What could your home loan repayments look like?

Calculate your loan repayments


Got a home loan question? Just ask!

We're here to help. Get free expert advice at a time that suits you. Choose a time to chat with a Home Loan Specialist.

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.

Tags: interest rate, rba cash rate, cash rate, property prices, borrowing power, loan repayment, mortgage repayment, repayments, home loan, fixed rate home loans, fixed-rate mortgage

Check today's low rates

Tell us what you are looking for and see if you can save.

Search rates

Check today's low rates

Tell us what you are looking for and see if you can save.

Search rates
Home loan repayment saver tool

Home loan repayment saver tool

Enter a few details about your home loan and see how much you could save on your repayments

Important legal stuff
Lendi is the trading name of Lendi Pty Ltd (ACN 611 161 856), a related body corporate of Auscred Services Pty Ltd (ACN 164 638 171, Australian Credit Licence 442372). We will never sell your email address to any third party or send you nasty spam, promise.
# Quoted rate applies only to PAYG loans with LVR of 80% or less with security in non-remote areas. All applications are subject to assessment and lender approval.
Lendi is a privately owned and operated Australian business. Our mission is to change the way Australians get home loans by providing a faster, smarter and more secure home loan experience designed around the customer’s convenience and needs. Although Lendi compares over 1600 products (2,500+ products including feature and pricing variations) from more than 25 lenders, we don't cover the whole market or compare all features and there may be other features or options available to you. Lendi Group Pty Ltd, which is the ultimate holding company of the Aussie and Lendi businesses is owned by numerous shareholders including; banks such as CBA, 1835i (ANZ’s external venture capital partner) and Macquarie Bank, the Lendi founders and employees, and a number of Australian institutional investors and sophisticated investors including UniSuper.
*WARNING: This comparison rate is true only for the example given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. The comparison rates are based on a loan amount of $150,000 over a loan term of 25 years. Fees and charges apply. All applications are subject to assessment and lender approval. Quoted rate applies only to PAYG loans with LVR of 80% or less with security in non-remote areas. All applications are subject to assessment and lender approval.
IMPORTANT INFORMATION: Loan terms of between 1 Year and 40 Years are available subject to lender and credit criteria. Maximum comparison rate will not exceed 14.99% (see comparison rate warning above). Any calculations or estimated savings do not constitute an offer of credit or a credit quote and are only an estimate of what you may be able to achieve based on the accuracy of the information provided. It doesn't take into account any product features or any applicable fees. Our lending criteria and the basis upon which we assess what you can afford may change at any time without notice. Savings shown are based on user inputted data and a loan term of 30 years. All applications for credit are subject to lender credit approval criteria. Top rates include lenders who are on our panel and are then defined by the circumstances provided by the borrower.
Made with love at Circular Quay in Sydney, Australia. © 2022. All rights reserved.