Can you afford a rise in the cash rate?
With the Reserve Bank of Australia (RBA) keeping interest rates at historically low levels (currently 0.1 per cent) and competitive mortgage rates as low as 1.6%, it’s easy to think the sun will shine forever.
When taking out a mortgage, however, we need to determine what we can afford in the worst-case scenario. For example, interest rates skyrocketed to 17.50 per cent in January 1990.
If this were to happen today on a $500,000 mortgage, your monthly repayments would go from $2023 per month to a whopping $7,388 per month!
Now it is very unlikely that interest rates will rise this quickly, but over the life of your loan (20-30 years), inflationary pressure will likely push the RBA to incrementally increase the cash rate subsequently pushing up your mortgage rate.
Implementation and Cost
Estimate the worst-case scenario over the life of your mortgage by using a mortgage repayment calculator.