Borrowers to get hit with interest rate shock
MANY home loan customers have never experienced a cash rate hike and it is likely this Tuesday will mark the eighth year since the last increase.
The nation's central bank, the Reserve Bank of Australia, has not raised the cash rate since November 2010. The rate has been on hold at 1.5 per cent - a historic low - for two years.
During the eight years since the last official rate rise the average home loan size has climbed by 28 per cent, from $309,900 to $395,800 leaving many households burdened with much higher debts.
Analysis by financial comparison website RateCity found the average discounted variable rate in November 2010 was 7.15 per cent compared to just 4.65 per cent now.
This has resulted in monthly mortgage repayments falling from $2093 to $2041.
But due to the heavier debt burden now being carried, it will only take one quarter-point increase for the typical mortgagor to be paying more than the 2010 average.
In recent months many lenders including three of the big four banks - except National Australia Bank - lifted variable rate deals pushing up costs for borrowers.
RateCity's spokeswoman Sally Tindall said it was "incredible" many borrowers have never experienced an RBA rate hike.
"Eight years is a long time between increases," she said.
"The RBA is unlikely to hike rates in the near future but that doesn't mean people should become complacent about paying down their debt."
But for those making interest-only repayments the pain has been felt by higher rates in the past two years.
RateCity found the gap between the average rate for owner occupiers paying principal and interest compared to interest-only rose from 4 basis points to 51 basis points.
While for investors the gap between principal and interest and interest-only increased from just 2 basis points to 31 basis points.
Homeloanexperts.com.au's managing director Otto Dargan said once the RBA eventually pushes up the cash rate it would "shock" borrowers.
"Many people are at risk because they have taken out car loans or credit card debt since buying a home," he said.
"Borrowers should take this opportunity to get on top of their home loan and pay off as much as they can while rates are low."
Mr Dargan said mortgage customers paying principal and interest on their loans should hunt for a rate that is below four per cent, otherwise they are paying too much.
He said there was also plenty of good fixed rate deals available, which signalled lenders were not expecting rates to rise anytime soon.