Cash rate to hit four per cent

While rates are expected to remain steady next week, economists are forecasting the official cash rate to increase by 150 basis points from next year.

The monthly Reserve Bank Survey of 20 leading experts by comparison website Finder.com.au – including senior economists from all four major banks – found the majority of respondents expect the cash rate to increase in 2015.

Earlier this year, the survey showed five respondents expected a rate rise by the end of this year.

But the latest survey results of 20 experts found just two predicting rates to rise this year.

The 17 experts who expect the cash rate to rise in 2015 are split on timing, with seven betting on an increase in the first half of the year while six believe it won’t start until the second half.

Three were not definitive on when they think the cash rate will rise next year, while one of the respondents (from UBS) did not comment on when the cash rate will rise.

Only two experts from Commonwealth Bank and Urbis are expecting the cash rate to rise by the end of this year.

Finder.com.au money expert Michelle Hutchison said borrowers can expect a “new normal” level with interest rates likely to increase by 1.50 percentage points from next year.

“While lenders are competing harder to lock in borrowers with a fixed home loan, the monthly Reserve Bank Survey shows that we can expect to see interest rates rise to a new normal level of 150 basis points higher from next year,” Ms Hutchinson said.

“Most of our experts believe the cash rate won’t reach the historical average of about five per cent, but rather reach around four percent, which is 150 basis points above the current cash rate of 2.5 per cent,” she said.

“And with 17 out of the 20 respondents betting on rates to start their way up from next year, borrowers need to ensure they can afford the extra cost.”

The forecast comes after a range of lenders dropped their five-year fixed rates below five percent in the past two weeks.

Ms Hutchison urged borrowers to consider their options and take advantage of the current opportunities with competitive deals while they last.

“Interest rate hikes are on the horizon and look set to start rising very soon, so borrowers need to start preparing now before it’s too late,” she said.

“For instance, variable rate borrowers with a $300,000 mortgage will need to factor in an extra $300 per month to keep up with repayments should their interest rate increase by 150 basis points.”

Fixed home loan rates are now among the lowest levels ever seen.

While Australians have typically shunned fixed rates, record-low prices could mark the beginning of a new trend among borrowers.

Those with a $300,000 mortgage who switch from the average variable rate of 5.50 per cent to the lowest five-year fixed rate of 4.95 per cent could save almost $16,000 in five years if variable rates rise by 150 basis points, according to Finder.com.au calculations.

 

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