Preparing for Interest Rate Hikes!
When you consider a ‘hike’, what is the first thing that springs to mind? A walk through the bush or a sharp rise? The RBA lifted the official cash rate by 25 points to .35 percent last week – the first rise in 11 years. While we understand that a rate rise is never a good thing, interest rates are still at historic lows and we wonder if the use of the word ‘hike’ is a necessary one!
Why does raising interest rates help with inflation?
In simple terms, with interest rates dropping to historic lows during Covid, businesses and consumers started spending! This increased demand and forced prices to rise. The most noticeable being the record increases we have seen in the housing market.
By the RBA increasing the cash rate, and the subsequent increase in interest rates, spending slows, demand reduces, and prices should then level out.
We knew rates couldn’t remain so low forever!
Even before the RBA’s cash rate increase announcement, really since late 2021, we have been watching lenders slowly lifting interest rates on their fixed and variable home loans (notice the word ‘hike’ was never mentioned). These rises, coupled with the RBA’s recent announcement, are largely due to higher-than-expected inflation, the winding back of the record-breaking rate cuts we saw during the pandemic and the Australian economy recovering sooner than expected.
Did you know that a higher interest rate was factored into your home loan application?
The Australian Prudential Regulation Authority (APRA) were preparing for interest rate rises as early as October 2021. When applying for a loan, as a broker, we complete a serviceability calculator with the lender you are planning on applying to. This calculator assesses your ability to make repayments based on your income and expenses, factoring in your expected loan repayment. In October 2021, APRA lifted the interest rate buffer from 2.5 percentage points to 3 percentage points. What this means is lenders are already factoring your ability to make payments at 3% above their current loan product rate.
When’s the next interest rates rise?
We can’t say for sure but Bill Evans, Chief Economist at Westpac said in his report last Wednesday (4th May) that he is expecting to see another 40-point increase to the cash rate in June followed by further 25 base point rises; seeing the official cash rate end this year at 1.75% and he is forecasting it to peak at 2.25% by the middle of 2023. This will, of course, depend on the strength of the economic recovery and the quarterly inflation rate.
Is it too late to fix my interest rate?
It is never too late to fix your interest rate. While rates are certainly not as low as they were this time last year, if you are concerned about rising rates and your household budget, fixing the rate on your loan gives you the added security of knowing what your monthly repayment will be during the fixed term.
There are some things you should consider before you lock your rate:
- You may want to pay a rate lock fee. You don’t have too but if you want to make sure the rate doesn’t rise between application and settlement, you can pay a ‘rate lock’ fee. The cost will vary, depending on the lender.
- limitations on making additional payments
- lack of redraw and offset
- being prepared when the fixed rate expires
The pros and cons on fixed rates are discussed further in our blog “Some considerations if you are looking at a fixed rate for your loan”
If you think that the limitations of a fixed rate outweigh the benefit, did you know you can split your loan? This might give you the piece of mind that a fixed rate can offer while also having the flexibility of a variable rate.
It pays to make additional repayments
Back in January 2022, APRA reported that average households were almost 4 years ahead on their home loans. Making additional repayments and paying off your loan faster, is the best way to save money and protect yourself from interest rate increases.
Where possible, look for a loan that has offset and redraw facilities. Loans with these facilities allow you to make additional payments and reduces the amount of interest you pay. It also allows you to withdraw the additional funds you have paid, if the need arises.
What does the interest rate 'hike' mean for my mortgage?
The impact will vary depending on what type of home loan you have, whether it is fixed or variable and what your current interest rate is. This is where we can help!!
Talk to one of our friendly, knowledgeable brokers who will discuss your individual circumstances and make sure you have the right home loan product to suit your needs, at the best available rate.
We don’t charge to do a review of your home loan! So, if you haven’t reviewed your loan for a while, now is the perfect time. By talking to us, you will know you are prepared for the next interest rate ‘hike’.
Contact us today!
