Australian house prices increased by more than 20% in the 12 months to 30 September 2021, driven by interest rates that fell to the lowest levels on record.

Home prices are very sensitive to changes in interest rates, confirms Gareth Aird, CommBank’s Head of Australian Economics, which means they’re likely to increase in value when interest rates fall.

“The reverse is also true,” he says.

“So while we saw home prices rise last year by an incredible amount, when interest rates begin rising, it is likely going to result in [property] prices going lower.”

Aird adds that while rising interest rates can be concerning for mortgage holders, they’re generally a good sign overall.

“If rates start going up, it’s usually because the economy is doing very well and it’s appropriate to take some heat out of the economy by lifting the cash rate. In Australia’s case, rates will be going up because wages are increasing, unemployment is low and inflation is higher,” he explains.

How much are property prices predicted to fall?

In Sydney and Melbourne, prices “already look like they’ve peaked”, Aird says.

“Booms don’t go on indefinitely. While the national property market was red hot last year, and some parts of the country such as Brisbane and Adelaide are still very hot, Sydney and Melbourne prices have peaked before the Reserve Bank of Australia (RBA) has even pulled the cash rate lever.”

While CommBank expects property prices to end the year broadly flat in 2022, before falling 8% in 2023, Aird adds that these forecasts “are against the background of a very strong economy – and we don’t think the RBA will raise the cash rate too aggressively”.

How can borrowers prepare for potential home loan increases?

For some households, rising interest rates won’t impact their budget too badly. This is because they continued to make the same repayments as interest rates fell.

“This means they were paying less interest and more principal each month, but making the same repayment as before. If interest rates go up again, the composition of interest in their mortgage repayment will increase, but the actual repayment won’t change,” Aird explains.

“Their debt won’t go down as fast, but in the main, those borrowers won’t notice a huge change. The people who will feel it directly are those who are paying the minimum every scheduled payment right now.”

These borrowers can stress-test their budget to make sure repayments remain affordable as rates increase.

You can check how much your mortgage repayments would increase, should interest rates rise, by using CommBank’s mortgage repayment calculator.

As a guide, if you have a $500,000 principal and interest home loan at a rate of 2.29% p.a. on a 30-year loan term, your repayments are currently $1,922/month.

  • A 0.25% p.a. rate increase = repayment of $1,987/month = increase of $65/m.
  • A 0.50% p.a. rate increase = repayment of $2,052/month = increase of $130/m.
  • A 0.75% p.a. rate increase = repayment of $2,119/month = increase of $197/m.

If you’d like the stability of home loan repayments that won’t change for the next few years, you could also consider fixing your interest rates for peace of mind.

Book a time with a CommBank Home Lending Specialist to discuss your options for securing a fixed, variable or split rate loan that best suits your needs

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Things you should know

CommBank does not make any predictions about the future direction of interest rates. This information has been provided without considering your objectives, financial situation or needs. You should, before acting on this, consider the appropriateness to your circumstances.