With lots of media speculation and chatter about the imminent arrival of rising interest rates, we wanted to pop back in and have a bit of a chat with you. As usual, there are some pretty wild (and also some conservative) predictions being thrown around, so we’re going to cut through the media & market noise and give you our best tips to prepare for the inevitable rate rise on the horizon.
So, why all this talk about rate rises now?
You might remember our last chat about this stuff back in July 2021? Well, it’s kind of the same deal, only the timeline appears to have accelerated slightly. We won't get into too much detail (we’ll let Michael from the ABC do that here) but effectively, there are two main indicators that are pointing to a cash rate hike sooner than previously anticipated:
- Inflation has picked up and, at time of writing, is sitting comfortably within the RBA’s target range of between 2-3%.
- The RBA has also announced that it will end its government bond buying program from Feb 10, another signal that conditions are moving more in line with its goals for the economy
Considering that almost every single ‘prediction’ economists made in July last year is now looking unlikely, you’ll pardon us if we also take these new ones with a grain of salt (as per usual.)
What effect will a rising cash rate have on my loan?
If your loan is fixed, nothing at all. Though if you're nearing the end of your fixed period, or are seriously considering breaking your fixed term, then definitely keep reading. If your loan is variable, this is where you could potentially see the cost of your loan increase, if the banks do decide to pass on a rate hike to customers (highly likely), if and when it occurs. But before all our variable loan friends panic, let’s chat about what that might actually look like in real terms.
For example, current 3 year fixed rates at the major banks are sitting around the 3.14% - 3.39% mark, while their variable rates are in the vicinity of 2.14% - 2.75%. So that means, for any significant price benefit to fixing your loan now, we would have to see either some considerable jumps upward, or a large number of rate increases in a short amount of time. And while that isn't totally impossible, it does seem unlikely given that things are still precarious for the economy, and we aren't exactly out of the pandemic woods yet.
*The above rates are based on a $500k loan at 80% LVR
Now, don't get us wrong, we aren’t telling you not to fix your loan, and if this kind of stuff really makes you anxious, then having the peace of mind that your repayments won't change for the next year or so could be a really great option for you to explore. As always, we think the best idea is to get some trusted loan advice on what will work best for you and your future plans.
The reality is though, rates will eventually be rising, be it May of this year when the markets are predicting, or not until 2024 (as the RBA was previously insisting). Remember, Australia hasn't seen an increase to the cash rate since November 2010, so there are a lot of borrowers out there who will have never experienced a cash rate hike. And while APRA has reported that the average homeowner is now ahead on their mortgage by four years thanks to an increase in household savings during the pandemic, we know that the ‘average’ homeowner is not every homeowner and there will still be people for whom a rate rise could create some serious financial pressure.
If you think that could be you, let us know and we can talk you through your options. Remember, banks don’t want you to fall behind, and they are legally obliged to help anyone who is experiencing financial hardship. It’s important that you start an open dialogue with them before things become unmanageable. If you’re feeling overwhelmed and you’d like some help, we’re always here for it.
And now, the bit you all came here for…
How can I best prepare for rising interest rates?
→ If you've got a loan
Review your loan
We love to say it, but: ‘your home loan should never be set and forget.’ When was the last time you reviewed your loan? If you can't remember, then we definitely recommend you make some time to do it now. A variable rate loan is a negotiable one, and it really can be as simple as contacting your bank and telling them you want a better deal. Plus, if a rate rise is on the way, the lower the base rate you can start from, the better. Want us to do the negotiating for you? Get in touch with us here.
*To all our current community members, remember we are closely watching and reviewing your loan regularly, but if you’re worried you can always reach out to us.
Explore a refinance or product swap
If you’ve got a fixed rate loan that you aren't happy with, or your bank didn't come to the party when you asked them for a better variable rate, it might be time for a change of scenery. And, by scenery, we mean bank or loan product. You might also want to use this as an opportunity to explore some lender options outside the ‘big four’ that have good rates and are more in line with your ethics and values. If this sounds like you, and you’d like some help, we’re here to guide you.
Take full advantage of your offset account
You know the drill - if you’ve got an offset account, chuck as much money in there as you can. This is even more important while the cash rate is so low, because any money that you have sitting in a regular old bank account, is actually going backwards. So, why not put it to work offsetting your home loan interest? And remember, you can still easily access the money if you ever need to.
Make extra repayments now to build up a buffer
The beauty of a low interest rate period like the one we are experiencing now is that it’s a fantastic time to make extra repayments, and build up a ‘repayments buffer’ so that you’re ahead when rates do rise. Of course, considering we’re living through a once-in-a-lifetime global health emergency, we understand not everyone will be able to do this. So, if you can, great! And if you can’t, know that you are absolutely not alone and meeting your minimum loan repayments in the current climate is still a really great position to be in.
Explore fixing, but be sure to get some good advice
While the urge to fix your loan will be very strong, it’s really important that you understand all the implications of a fixed rate home loan. Fixed loans can be restrictive, and you can be hit with very high costs if you decide you want/need to get out early. However, having the peace of mind that your loan costs will be set in place for this next little while could be a great option for some. And remember, you can also fix a portion of your loan, in whatever ratio you choose, to kind of get the best of both worlds. Need help with this? You know what to do.
→ If you’re looking to buy
Borrow what you should, not what you can
In Step 3 of our guide to buying a property (check it out here) we mention borrowing what you should vs. what you can. What we mean by that is, there’s a maximum amount that a bank will lend you based on your income and expenses but, this amount might not be in your best interests over the long term. So, it’s important that you really get an understanding of what you can comfortably afford to borrow, and stick within that limit. This is good advice no matter what is happening in the market, but it becomes even more important when we talk about rising interest rates. If you’re using a broker, have a conversation about what this looks like for you, and if you’re going it alone, you can run some different borrowing amount scenarios on our calculator here.
Do some rate rise modelling
This last period of incredibly low interest rates, coupled with the seemingly meteoric rise of property prices, has meant that many people were able to ‘afford’ bigger home loans. But what does that look like when rates start to rise? If you’re stretched to your absolute maximum on your loan, then it doesn't look great. If you are looking to get into the market, we think it’s really important to also think about what your loan costs would look like if rates were to go up? Could you still afford your repayments and all of your expenses? Let’s look at some examples:
Let’s say you’ve got a loan of $500,000 (80% LVR, P&I repayments) and a variable interest rate of 3.05%. Your current monthly repayment is $2,122. Then, the cash rate increases by 0.50% and your bank passes that on to you, taking your interest rate to 3.55%. Your new monthly repayment is now $2,259, an extra $137 per month.
What if the cash rate were to increase by 1.0%? That would take your monthly repayment to $2,402, or an extra $280 per month. See where we’re going here?
Let’s do one more. If the cash rate were to rise by 1.65%, and costs were passed on in full by your bank, your new variable rate would be 4.70%. This would mean a monthly repayment of $2,593 or an extra $471 per month from your original rate of 3.05%.
*The handy numbers above are from the good people at www.canstar.com.au
Pretty sobering stuff. That said, it’s worth noting that market rates don’t always move in line with the cash rate. Sometimes the banks will pass on the full change, other times the change might be more or less than the cash rate adjustment, and other times they might not move rates at all. The main thing is that you’re aware of the possibility and consequences of rising rates, and that you’re factoring that into your long term property purchase plans. Again, your broker should be able to help you with this, but you can also run some numbers on our calculator here.
Rate lock
If you're about to begin your loan application journey and/or have been pre approved and you're nervous about your fixed rate rising before you buy or settle (particularly if it's a really low fixed rate), it could be good to look into rate locking as an option.
Rate lock is when you pay an additional fee to 'lock in' your fixed rate percentage. The fee is usually a small percentage of your loan amount, or a flat rate that is usually around $750. Your interest rate at the time of your application is then locked in, and you’ll avoid getting stung by any future interest rate rises. Sounds good right? Well, there’s always some finance-y fine print. If interest rates are cut, then as you've locked in the higher rate, you won't get to enjoy the lower rate on offer. It can also be a prohibitive additional fee, if you can't justify the cost. Lastly, a rate lock will only last the duration of your pre approval (usually 90 days). So, if you need to renew your pre approval, you'll need to pay the fee again.
Get help!
There’s no doubt about it, this interest rate stuff is tricky and for so many people, the process can feel foreign and stressful. From mortgage advisers to buyer’s agents, there are a whole range of people who can help guide you through and make things feel less daunting. We’re always up for a chat, even if you want to just run something by us, and remember there is never any obligation to ‘use’ us. If you ever need to, you can reach us here.
If all this rising interest rate talk has got you worried, why not reach out to us for a chat? Remember, there’s never any obligation, and if we can offer you some peace of mind, we’d be glad to do it.
The finance information contained in this post is general advice only, and doesn't take into account your personal circumstances or goals. You should always reach out, or seek professional advice, before making any financial decisions.