How much can interest rates move over the next 30 years?

[JuddsABlue]

Recent home buyer on a 30 year standard variable loan

I'm just toying around on excel creating different payment forcasts over my loan and how it effects how much interest I pay etc etc. Just developing an understanding of my loan etc and how it will develop over time

So anyway, I have one sheet that goes through various interest rate rises and cuts etc. Its all rises actually, but I'm not really sure what a realistic interest rate rise is.

Over the next 10, 20 and 30 years, how high could rates potentially rise and fall? Would we see a sudden spike where they shoot up a few full percent, or will it be much more drawn out etc?

I have room for lots of scenarios, just trying to get an understanding of how quickly and high rates could rise in the real world over such a long period of time

 

[Visions]

I don't think anyone can tell you with any degree of certainty what will happen to rates in a years time let alone 10, 20 or 30 years. There are too many variables that can effect the outcome. Inflation, recessions, Aussie dollar, consumer spending, etc can be hit or miss. Look at past history and the swings. In 89/90, when rates were around the 17% mark, do you think anyone could have foreseen that rates would drop 7% in 2 years time or that rates would be around the 5-6% mark now? Too hard to tell. All you have is economists giving you guesses that aren't worth jack.

Your best option if you intend living in your property for the rest of your days is to regularly put a bit extra into either the loan or offset account reducing the interest payable. That is one thing that you can be sure of.

 

[Simon_Nesbit]

Firstly, congratulations on your purchase.

Secondly, don't plan to take 30 years to repay your home, or keep the same loan for that period of time.

Thirdly, (and should have already been done before choosing a loan), work out what your longer term goals for the property are - will you live in it forever, renovate, convert to an Investment Property, etc, etc. The answer will change the best method of repaying the debt (mainly due to tax implications in the future).

Finally, (ignoring off-set and line-of-credit scenarios, interest-only IP, etc) setup auto payments the day after payday. If you get paid weekly, pay the loan weekly (fortnightly/etc). The time value of money isn't much, but over an extended time will make a noticeable difference. Where you will make substantial inroads is to regularly increase your "set" repayments.

Lets say your minimum repayment is $2000/m. Instead you pay $1000pf. In a year, you have paid an extra 2k - over time will shave 5 years off your loan.

If $1000 is comfortable, make it $1100. $1200. Find the point at which you start actively thinking "can I afford this?". If you get a pay-rise, increase your repayment.

It's amazing how quickly a 30-yr loan term can be brought down to 12-15 years, just by strict budgeting.

Interest rates are essentially a means to the end. They will fluctuate over time, sometimes high, sometimes low. The temptation is to reduce repayments in times of lower interest (like now), but this not only reduces the best "balance reducing" times, but makes rate-rises (and associated repayment increases) more difficult to manage.

Good luck!

 

[JuddsABlue]

Thx all

Def making extra payments and hammering it extremely hard now. I've estimated every extra dollar I spend now ill save 4x in interest so I'm pretty inspired to pour ever dollar in

I was trying to work out a rough date for completing the loan but with the interest rates most likely to rise but how high I'm not sure it makes it difficult

I'm 25 so it's not a lifetime house, something I think could get a strong rental return in the future, so id love to be able to get this done and then probably move closer into town (currently a 25m drive no traffic to the CBD) and rent this out

Either way more paid now is more money saved its a simple concept so ill keep hammering to get the loan down

 

[Simon_Nesbit]

Thx all

Def making extra payments and hammering it extremely hard now. I've estimated every extra dollar I spend now ill save 4x in interest so I'm pretty inspired to pour ever dollar in

I was trying to work out a rough date for completing the loan but with the interest rates most likely to rise but how high I'm not sure it makes it difficult

I'm 25 so it's not a lifetime house, something I think could get a strong rental return in the future, so id love to be able to get this done and then probably move closer into town (currently a 25m drive no traffic to the CBD) and rent this out

Either way more paid now is more money saved its a simple concept so ill keep hammering to get the loan down

If that's the case, I suggest you read up on off-set accounts and the tax implications of carry-over debt "purpose".

Talk to your broker, or your look on your lender's website. If you want to talk specifics, feel free to pm.

 

[Catfish Alley]

It's a fairly hard thing to predict but things seem fairly stable now so I wouldn't expect them to change drastically over the next few years. Like Simon said, if you're at a comfortable rate now then you might as well work at paying off as much as you can. I'm at 2.7%. Love it!

 

[Scotland]

I just can't see a return to the 'bad old days' of 17% interest rates. With higher house prices relative to income and longer loan terms (ie no room to move on reducing principal) people just can't afford to pay much more. Additionally, rents are sky high and the bulk of real estate is held by one generation who need values to stay where they are to retire without draining the federal budget.

A basic home/unit in any cap city costs upwards of $300k nowadays - at least.

Your average person buying a $300k home/unit is doing so because they simply can't afford anything better, not because they want to destroy the mortgage in 5 years.

Factor in a 10% deposit and $270k @ 5% is $260 pw. Take that up to 17% and it's $883 pw. How many people with mortgages that size can afford an extra $623 pw? Not many.

Apply the same calc to a $500k home, which is about the median across the cap cities and you're looking at over $1,000+ pw per increase in interest.

You could argue 'well if you can't pay back the loan at 17% like I had to in 1989 blah blah' but thousands of people unable to pay their mortgages/sell their homes/find affordable rental accommodation would not bode well for anyone. I firmly believe this factors into the thoughts of the RBA when setting cash rate targets.

 

[Scotland]

It's a fairly hard thing to predict but things seem fairly stable now so I wouldn't expect them to change drastically over the next few years. Like Simon said, if you're at a comfortable rate now then you might as well work at paying off as much as you can. I'm at 2.7%. Love it!

Sigh, if only we could get that here...

I think my loan has gone up 2% then down 1.5% (give or take - cash rate lower now then when I got it but I won't rage about that ITT...) in the time I've had it.

I like to think of it as if the interest is $1000 pm at the peak (for example) and $750 at the trough them if I keep paying $1000 then within 4 months I am a month ahead on interest payments for a given year. I understand how the maths works, this is just a simplified way of looking at it. If you had one year at the lower rate and paid $1000 pm you'd effectively make 15 months worth of interest payments, meaning an extra $3k goes off the principal.

 

[Lyyynnnchy]

Thx all

Def making extra payments and hammering it extremely hard now. I've estimated every extra dollar I spend now ill save 4x in interest so I'm pretty inspired to pour ever dollar in

I was trying to work out a rough date for completing the loan but with the interest rates most likely to rise but how high I'm not sure it makes it difficult

I'm 25 so it's not a lifetime house, something I think could get a strong rental return in the future, so id love to be able to get this done and then probably move closer into town (currently a 25m drive no traffic to the CBD) and rent this out

Either way more paid now is more money saved its a simple concept so ill keep hammering to get the loan down

You should be changing the loan to interest only and putting the extra money into an offset if this is the case

 

[dmc333]

 

[Scotland]

You should be changing the loan to interest only and putting the extra money into an offset if this is the case

If you're planning to buy then sell as you trade up then there isn't a huge benefit in doing this, but if you're planning to buy then keep and rent out as you trade up then it's in your best interest to do this.

Max LVR allowable and all savings/pay deposits etc. into offset.