5 steps to be rate-rise ready
Amid the biggest global pandemic in a century, house prices in Australia have risen by 22.4 per cent (the highest increase in 32 years).
Coupled with inflationary hikes dominating the finance headlines and speculation about looming interest rate rises, it pays to be rate-rise ready.
Home loan lender ME Bank and many of its contemporaries are urging borrowers to prepare themselves for future rate hikes later this year.
ME Bank’s Chief Economist, Peter Munckton, says financial markets are pricing in the first Reserve Bank of Australia cash rate hike by the middle of this year and a full percentage point of rate rises by the start of 2023.
“The (initial) rate rise may occur sometime between the fourth quarter of this year and mid next year — and possibly earlier. This depends upon domestic inflation and wages outcomes, as well as what happens to global interest rates, particularly in the US.”
How does this affect domestic borrowers? As an example, a one per cent increase to the cash rate which, if subsequently passed on to borrowers, would take the average variable-rate owner-occupier mortgage in Australia to almost four per cent. This adds about $270 per month to an average $500,000 loan.
To help ease the burden of extra repayments and offset potential rate rises, ME has devised some handy hints on how to be rate-rise ready:
1. Be aware that repayments can rise and fall
Ask yourself how any rate rises would affect your money goals, such as renovations and holidays, as well as other lifestyle choices. Online calculators can help you crunch the numbers.
2. Ensure that your home loan is competitive
If your home loan isn’t charging a competitive rate, not only are you wasting money but you’ll also be left even more out of pocket if rates climb higher. It’s worthwhile shopping around.
Despite some fixed rates already increasing, many banks are reducing their variable rates.
3. Consider fixing
If a modest rate hike would crimp your lifestyle, consider locking in a fixed-rate loan.
Despite some banks increasing fixed rates recently, rates remain at historically low levels. Look for a fixed loan that allows extra repayments, so you can whittle down the balance sooner. It’s also worth paying for a feature called a ‘rate lock’, which allows borrowers to guarantee a competitive rate during the application or settlement period, so you don’t miss out on securing it.
Borrowers with fixed loans in a high-rate environment also need to be aware of and budget for a possible rate increase at the end of their fixed-loan term.
4. Ramp up extra repayments now
The best defence against higher rates is having a smaller loan balance. Making extra repayments or paying a lump sum now, while rates are still at record lows, helps to pay off the loan sooner and minimise the impact of possible future rate rises. Loans with offset or redraw facilities also provide you with the peace of mind to access that extra money if you need it.
5. Scale back other debt
Debt is not always a negative. But if interest rates head north, be mindful that you could be paying more on personal loans and credit cards. If you have an outstanding credit card balance, try chipping away at the debt today. Switching to a low-rate card with no annual fee can make this easier.
(Source: ME Bank)