Be Prepared For Higher Interest Rate !

Hi

Since September 2008 we have enjoyed the down ward cycle in interest rate movement. Cash rate have dropped 4.25% over last 12 months.
With so much talk in the media and RBA’s meeting comments, it seems the reverse is going to happen soon.

For this week, I thought it would be good to understand how much it will impact our cash flow (before it happens).
I understand everyone is on different loan package and rates, for simplicity I use a round interest rate figure and assume everyone is on 5% rate now.
Table 1 calculates the monthly repayment if you are on principal and interest loan over 30yrs term. For example, if you are on $400k loan then your monthly repayment is $2,147/month.

Table 1 - Monthly Repayment (P&I over 30yrs)

Loan Amount 5.00% 6.00% 7.00% 8.00%
$100,000 -$ 537 -$ 600 -$ 665 -$ 734
$200,000 -$ 1,074 -$ 1,199 -$ 1,331 -$ 1,468
$300,000 -$ 1,610 -$ 1,799 -$ 1,996 -$ 2,201
$400,000 -$ 2,147 -$ 2,398 -$ 2,661 -$ 2,935
$500,000 -$ 2,684 -$ 2,998 -$ 3,327 -$ 3,669
$600,000 -$ 3,221 -$ 3,597 -$ 3,992 -$ 4,403
$700,000 -$ 3,758 -$ 4,197 -$ 4,657 -$ 5,136
$800,000 -$ 4,295 -$ 4,796 -$ 5,322 -$ 5,870
$900,000 -$ 4,831 -$ 5,396 -$ 5,988 -$ 6,604
$1,000,000 -$ 5,368 -$ 5,996 -$ 6,653 -$ 7,338

The Impact

Now let’s see what is the impact if interest rate increase by 1%, 2% or 3% ie to 6%, 7% or 8%.
For a $400k loan if interest rate increase by 1% your loan repayment will increase extra $251/month (Table2) or $3,011/year (Table3).
See blow tables for other calculations.

Table 2 - Monthly Difference to 5%

Loan Amount 5.00% 6.00% 7.00% 8.00%
$100,000 -$ 63 -$ 128 -$ 197
$200,000 -$ 125 -$ 257 -$ 394
$300,000 -$ 188 -$ 385 -$ 591
$400,000 -$ 251 -$ 514 -$ 788
$500,000 -$ 314 -$ 642 -$ 985
$600,000 -$ 376 -$ 771 -$ 1,182
$700,000 -$ 439 -$ 899 -$ 1,379
$800,000 -$ 502 -$ 1,028 -$ 1,576
$900,000 -$ 565 -$ 1,156 -$ 1,772
$1,000,000 -$ 627 -$ 1,285 -$ 1,969

Table 3 - Yearly Difference to 5%

Loan Amount 5.00% 6.00% 7.00% 8.00%
$100,000 -$ 753 -$ 1,542 -$ 2,363
$200,000 -$ 1,505 -$ 3,084 -$ 4,727
$300,000 -$ 2,258 -$ 4,625 -$ 7,090
$400,000 -$ 3,011 -$ 6,167 -$ 9,453
$500,000 -$ 3,764 -$ 7,709 -$ 11,817
$600,000 -$ 4,516 -$ 9,251 -$ 14,180
$700,000 -$ 5,269 -$ 10,792 -$ 16,543
$800,000 -$ 6,022 -$ 12,334 -$ 18,907
$900,000 -$ 6,775 -$ 13,876 -$ 21,270
$1,000,000 -$ 7,527 -$ 15,418 -$ 23,633

One strategy that you might want to implement is to cut back on your spending now and increase your monthly repayment. So eventually when interest rate have come back up you won’t be as panic.
Increase monthly repayment will also reduce your loan life (if interest rate remain the same). For example if you can pay extra $251/month on the $400k loan, you can save $88k in interest or reduce loan term by 6yrs and 2months !

Over next few weeks I will point out a few other strategies to pay off your loan faster.