What Not to Do When Rates Move on Your Home Loan

Economic news affects your home loan, but you still choose how you respond.

The RBA cash rate is currently 4.85% p.a. When it moves, lenders usually adjust their variable rates in the same direction, though not always by the same amount or at the same time. For Newcastle homeowners and buyers, the useful question is how to set up your loan so that these movements are manageable.

How Does the RBA Cash Rate Affect My Home Loan Interest Rate?

The cash rate is the RBA's benchmark, and lenders use it as a reference point when they set their own variable rates. A change in the cash rate often flows through to variable home loan rates, but each lender decides how much to pass on and when.

That is why two borrowers with similar loans can see different outcomes. Your rate also depends on your deposit, your loan to value ratio (LVR), the loan product you choose and any rate discount your lender offers. Fixed rates are priced differently again, because lenders look at where they expect funding costs to go, not only at today's cash rate.

What a 0.25% Rate Rise Means for Your Repayments

A 0.25% rise on a $600,000 loan adds roughly $100 a month to principal and interest repayments over a 30 year term. This uses an illustrative rate of 6.75% p.a. and is not an offer or a current lender rate.

Consider a hypothetical Newcastle couple with a $600,000 owner occupied home loan. At 6.75% p.a. over 30 years, their monthly repayment is about $3,892. If their lender lifts the rate to 7.00% p.a., the repayment becomes about $3,992. That is around $100 more each month, or about $1,200 over a year.

They could simply absorb the cost, but they could also work through three steps with their broker. First, they ask their lender whether a lower rate is available. Second, they compare other lenders offering a lower rate on the same loan size. Third, they weigh the costs of switching against the saving before deciding. Refinancing can involve fees and a new loan term, and the result depends on their circumstances and on the lender's policy, so it will not be the same for every borrower. If you want to run your own numbers, use a repayment calculator and test a few rate scenarios.

If your loan has not been reviewed for a while, our refinancing page explains how a switch works and what it can cost.

Fixed, Variable or Split Rate: Which Suits a Changing Economy?

No single option suits everyone. A fixed rate gives repayment certainty for a set period, a variable rate moves with the market, and a split loan lets you hold part of your loan in each.

The trade-offs are real:

• Fixed rate: Your repayments stay the same, but you may pay break costs if you repay or refinance early. Extra repayments are often capped, and an offset account is often not available.
• Variable rate: You benefit if rates fall and usually get more flexibility, but your repayments can rise.
• Split rate: You spread the risk across both. The downside is that you only get part of the benefit of either option.

A split loan suits borrowers who want some certainty without locking in everything. If you already have a fixed rate, our fixed rate expiry page covers what happens when it ends, because the loan usually reverts to a variable rate set by the lender, which may be higher than other available rates.

Is a Linked Offset Account Worth It When Rates Are Uncertain?

An offset account can reduce the interest you pay because the balance in the account is netted off your loan balance before interest is calculated. It also keeps your savings accessible.

For example, if you have a $600,000 loan and $30,000 sitting in a linked offset, interest is calculated on $570,000. Your repayment stays the same, but more of it goes towards the principal. The trade-off is that loans with an offset can carry a higher rate or an annual package fee. The benefit only outweighs that cost if you hold a meaningful balance in the account. Ask for the full cost comparison before you decide.

What Not to Do When Interest Rates Change

The most common mistakes are reacting to headlines, ignoring your loan for years and taking on more debt than you can comfortably repay.

In practice, that means:

• Do not panic and fix everything. Locking in after a rise may mean you miss out if rates later fall, and breaking a fixed loan early can be costly.
• Do not stay put out of habit. A lender's loyal customers are not always on their lowest rates, so it is worth asking for a rate review or comparing lenders now and then.
• Do not stretch to your maximum. Your borrowing capacity is the most a lender may offer, not the amount you should borrow. Leave room in your budget for repayments to rise.
• Do not compare only the headline rate. Fees, features and the comparison rate all affect what a loan really costs.

How Economic Conditions Shape Your Borrowing Power

Economic conditions can change how much a lender is willing to lend you, because lenders test whether you could still meet repayments if rates rose. Each lender applies its own assessment, so the amount you can borrow can differ between them.

This matters most if you are planning a first home loan or a move up. Getting pre-approval before you start searching gives you a clearer budget, but it is not a final approval and it does not last forever. Your circumstances and the lender's policies can change before you sign a contract. Our first home buyers page explains how the process works.

A local broker can compare options from banks and lenders across Australia and match them to your situation. If you are in the Hunter, our Newcastle mortgage broker page shows how we can help.

Whether you are buying your first home or reviewing a loan you have had for years, we can walk you through your options, explain the costs and help you plan for rates going up or down. Call one of our team or book an appointment at a time that works for you.

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