How high will interest rates go in 2023?

If the last few years have taught us anything, it’s that nobody (not even the governor of the RBA) can predict the future of the Australian economy with any certainty. Unexpected global events like the pandemic and, more recently, the war in Ukraine, have a nasty habit of upending the most educated of guesses.

So, with that caveat very much in mind, let’s take a look at what the year ahead might have in store for homeowners, prospective homebuyers, and everyone in-between.

Are there likely to be more rate rises?

It’s highly likely that we will see further rate rises next year. Many (although by no means all) financial experts are forecasting that the cash rate will peak at 3.85% somewhere around the middle of 2023. Others don’t see it going quite that high, but even the most optimistic of pundits are predicting at least one more rise of 25 basis points, which would take the total to 3.35%.

Is there any chance rates will start to come down again in 2023?

As we saw last year, anything is possible. But the reality is, the chance of rates decreasing in the next 12 months is on the low side. The RBA has a delicate balancing act to pull off to get the economy back on track.

Even if inflation starts to come down significantly, reducing rates too soon could have an adverse effect on unemployment and GDP. The consensus among the ‘Big 4’ banks and other industry heavyweights is that rates probably won’t start to decline until 2024.

What does this mean for people due to roll off fixed rates in 2023?

While people on variable rates have seen their monthly repayments ramp up steadily throughout the second half of 2022, those on fixed rates have so far been insulated from the effects of eight successive rate rises (and counting).

And there’s more people on fixed rates than there used to be. The proportion of mortgage holders on fixed-rate loans almost doubled from 20% to just under 40% between early 2020 and early 2022 thanks to the record low interest rates available at the time. Most of these are set to roll off over the course of the next two years, with the greatest number due to expire in the second half of 2023.

According to the RBA, approximately half these people will face an increase in monthly repayments of at least 40%.

If you’re one of them, and you haven’t already, it’s a good idea to check your loan contract to see what your variable rate will be when your fixed rate rolls off. Then, if you can, it’s worth thinking about making additional repayments at the new rate before it kicks in. If you end up reaching the cap on additional repayments specific to your loan, you might want to consider putting these surplus funds in a savings account.

It might involve some serious budget-tightening, but not only will it get you accustomed to the new rate ahead of time, you’ll be building up a financial buffer while you’re at it.

Can refinancing help?

If you’re in a position to negotiate a better rate, either with your current lender or a new one, it’s certainly worth looking into. But it’s important to understand that, depending on your circumstances, refinancing might not be in your best interests. For example, if you’re on a fixed rate, you will likely be required to pay a break fee in order to refinance.

Check out our ultimate guide to refinancing for a more in-depth look at the pros and cons.

The often-overlooked silver lining to the current rate-rising situation is that it’s a good time for savers, whether via term deposits or high-interest savings accounts. Making use of one of these can be particularly beneficial if you’ve reached your additional repayment cap (which usually applies to fixed-rate loans) as you could earn a similar or potentially higher rate than you’re paying on your mortgage.

Is buying a house in 2023 a bad idea?

Not necessarily. After all, house prices are falling at a rate not seen for many years. That said, it’s more important than ever to be realistic about what you can afford.

Factoring in future rate rises to your budget will help set you up for success in the long run. If you know you can afford to pay your loan at a higher rate (an additional 3% is a good rule of thumb), you’ll be in a strong position when rates start to come down again.

That’s if you opt for a variable rate, of course. Given the unpredictability of the last few years, you may prefer the certainty of a fixed rate. For more information on the differences between the two, click here.

It’s also worth remembering that financial assistance is available to first-time buyers in the form of several government schemes. Check out our comprehensive guide to see if you’re eligible.

Whichever way you go, the point is that you’re not obliged to borrow the maximum amount your bank or broker says you can. Allowing yourself some financial breathing space will give you peace of mind while the economy remains uncertain and should, with a bit of luck, mean you’re able to pay down your loan ahead of schedule when rates do begin to decline.