Dr Edwards, a highly rated economist, suggests the RBA could potentially raise the current cash rate to 3.5% from 1.5% by 2019.
A rate increase of the magnitude suggested by Dr Edwards would push variable interest rate levels on home loans toward 6-7% and would put significant strain on households already struggling to cope.
Evidence suggests that interest rates at their current levels have to rise in the coming years, as they have been in steady decline for nearly three decades.
The long term average for the RBA cash rate is around 5.2%, significantly higher than where we are currently sit at 1.5%.
Dr Edwards also points out that he believes the new long term average for the cash rate will be significantly lower, at around 3.5%, given the increase in household debt since the global financial crisis.
Record low interest rates have been one of the key drivers in the explosion of house prices in Sydney and Melbourne and the RBA and banks have already started raising rates and tightening lending requirements on interest only loans to investors.
However analysis from the RBA suggests that there is still a 98% chance of interest rates remaining the same at the next meeting.
Longer term however, it appears that interest rates are set to slowly rise, potentially making it a good time to consider locking in a fixed rate on your home loan.
The average variable home loan rate sits slightly below 4.0%, making the payments on a $300,000 loan around $1432 per month.
Should that rate rise to 6.0%, that would in turn increase those same payments to $1798 per month.
*Estimates based on a $300,000 home loan in New South Wales over 30-years. Fixed rate home loan estimate over 3-years.
Fixed term home loan rates are similar to variable home loan rates, with some being slightly higher. This suggests that banks are still mixed on their predictions about the rate at which interest rates will rise in the near term.
Dr Edwards predictions appear to be more aggressive than many other industry experts, with a recent Bloomberg survey stating that of 24 economists surveyed, eleven expect rates to remain on hold until mid 2018.
However if rates are to rise in line with predictions from Dr Edwards, then locking in a fixed rate home loan now could be a smart move with the potential to save hundreds of dollars each month.
Speak to a Mortgage Broker today to find the most competitive rate you can on a fixed rate home loan.
Locking in a fixed rate home loan
By locking in your interest rate with a fixed rate loan, you’re protecting yourself over a period of 1-5 years from potential interest rate rises. This is something that can give you a level of certainty over your household budget. Speaking to a Mortgage Broker is the easiest way for borrowers to find out if a fixed rate home loan is going to be suitable for their needs.
The issue with a fixed rate loan is if interest rates drop then you are forced paying a higher rate than you might have otherwise. Fixed rate loans also tend to have higher fees associated with ending or changing contracts. You broker will be able to compare the loans from a range of different lenders and find the best deal for your situation.
If you are able to lock in a fixed rate loan at 0.25 basis points lower than a standard variable loan, then you have the potential to come out ahead even if the RBA cuts interest rates further or if the banks or lenders decide to reduce their rates on variable home loans.
If you’re a first home buyer or looking to buy a house or refinance, speak to one of our Mortgage Brokers today to secure the best rate on a fixed rate home loan.