Rate rises to cause more interest paid on average loans

Analysis on the big four's cash rate forecasts from RateCity for Australian Community Media has shown borrowers are set to be stung with hundreds of dollars in additional interest charges, once the Reserve Bank begins upping rates over the next two years.

The calculations are based on the most up-to-date average loan size in each state and territory, with the ACT median loan of $585,859 expected to incur additional interest payments between $359 and $601 a month.

Across the border in NSW the potential rate rise is worse, with an average mortgage in the most populous state potentially incurring extra fees between $477 and $800.

Average loan sizes in the ACT are also the third highest nationally after NSW and Victoria.

RateCity research director Sally Tindall stressed borrowers need to build up a savings buffer and highlighted a rate hike in the short term is inevitable.

"No-one's going to like the idea of handing their hard-earned savings over to their bank in extra interest charges," Ms Tindall said.

"Don't sit back and wait for rates to rise, build up a buffer as soon as you can by putting extra money into your offset, or straight into your home loan. The lower your loan size when the rate rises do come, the less of a shock you'll get."

By December 2023, Commonwealth Bank is expecting the RBA to inflate rates to 1.25 per cent, while NAB and Westpac assume the cash rate will sit at 1.5 per cent.

ANZ at the top end of the spectrum believes the cash rate is likely to move to 2 per cent, which would translate to higher mortgage rates offered by lenders on both owner-occupier and investor loans.

Rising interest has been front and centre following speculation by the RBA that a "plausible" rate rise could occur later in the year.

Higher than expected levels of inflation above the RBA's target range of 2 to 3 per cent has fuelled the market to believe a hike could occur as early as August.

Earlier action by the RBA has also been touted following the US Federal Reserve flagging it may raise rates as early as March. However, RBA governor Philip Lowe quashed speculation, highlighting US inflation was double that of Australia.

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Longer term rate predictions by the big four also show the peak rate by 2024 could be anywhere between 1.75 per cent and 3 per cent.

Ms Tindall noted the RBA is cognisant of increasing levels of debt held by Australians as a result of the property boom which has seen values increase by over 25 per cent over the year.

"Over the next couple of years, the cash rate is likely to end up somewhere between 1.25 and 2 percent, which historically is still incredibly low," she said.

"As the governor pointed out, our high level of debt will help keep the rate hikes to a minimum, because he's expecting households to make faster and more significant cutbacks in response to rate hikes than previously."

According to statistics from the Australian Prudential Regulation Authority, household savings are at an all time high, with nearly $119 billion more savings accounts than a year ago.

The RBA in its quarterly monetary statement released on Friday flagged it expects this ratio will likely decline over the year and also assist consumption.

The savings is also touted to assist in cushioning the blow from rising interest payments.

Ms Tindall did highlight a number of people would have been financially impacted by the pandemic and would likely not have a savings buffer built to assist in additional repayment costs.

"When rate rises hit, some of these people might be forced to have difficult conversations with their bank," she said.

RateCity is a financial comparison website.

Australia's economic rebound from the pandemic is expected to continue through 2022, despite potentially loosing some steam from the recent Omicron outbreak.

Gross domestic product is expected to grow above 4 per cent according to the RBA unemployment is slated to dip to 3.75 per cent by the end of the year.