As homeowners in Australia, we’ve been on the receiving end of incredibly good interest rates for many years. In fact, the cash rate has been held by the RBA at its record low position for over 16 months.
This might be set to change when interest rates rise.
On 5 April 2022, the RBA made its Monetary Policy Decision announcement. The result is a strong belief that interest rates will soon be on the rise. And all four major banks, Westpac, CBA, ANZ and NAB are predicting a cash rate of 1% or more by the end of 2022.
When Interest Rates Rise How Will This Impact You as a Borrower?
The majority of Australian borrowers have had fantastic interest rates at under 2% for over a year. So many borrowers are wondering how they might be impacted when interest rates rise. Let’s look at an example.
Jane is an average mortgage holder with a $500,000 loan at a major bank. She’s had a fixed interest rate of 1.94% for the last two years, but the term is ending. She could face a revert rate of over 3%, which would see their repayments rise by $300 to $375 per month. Of course, Jane can renegotiation or re-fix her mortgage, but with the RBA’s interest rate rising, she will likely be offered a significantly higher interest rate regardless.
This example could leave many borrowers worried. And you might be wondering – could I manage an extra $300 or $400 a month on my home loan? But the first step is not to panic. There are plenty of things we can do to ensure that we ride through any interest rate hikes with barely a blip on our financial radar. So, here’s what to do when interest rates rise.
What To Do When Interest Rates Rise
Do a (Financial) Stress Test
Banks stress test your loans (that means they analyse it based on your perceived ability to pay in changing circumstances – like rising interest rates!). In order to feel comfortable and worry less, you need to do the same.
This simply means running the numbers and seeing how you would manage your repayments at a higher rate. If you find that you’re in a position like Jane, and the extra repayments might see you missing out on other fantastic parts of your lifestyle (yoga classes or UberEats, for example), there are things you can do. For example, you could lock in all or part of your mortgage at a fixed rate. This would give you the comfort of knowing precisely what you’ll be paying each month regardless of what interest rates do.
Think About Refinancing
If you’re wondering what to do when interest rates rise, refinancing should definitely be on your radar. For fixed rate borrowers, you should be sure to consider your refinancing options before the end of your fixed rate term. You don’t want to end up slipping into a revert rate that you’re not prepared for. And you might just get a better deal.
If you have a variable rate mortgage, now is a great time to consider moving to a new provider who can offer you more (or less, in terms of interest rates!). Of course, you should re-evaluate your variable rate loan at least once a year anyway. This lets you see how your current loan stacks up against the industry. And it ensures you’re always getting the most for your money.
Read more: Top Tips for Refinancing
Increase Your Repayments
It’s a great idea to increase your repayments now, while your interest rates are lower. This means every dollar is working harder for you, and the more you pay now, the less you have to pay in interest when interest rates rise.
If you’ve reached the extra repayments cap on your fixed loan, consider putting any extra money into a savings account so that you have it available to pay down the loan in the future.
Decrease Your Debts
Now is a great time to look at decreasing any other debts you may have in your household. This might include personal loans or car loans. The sooner you can pay these off, the more cash you’ll have free to service any home loan repayments and ensure you can maintain your lifestyle just the way you like it!
Utilise Your Offset Account and Redraw Facility
If you have an offset account or a redraw facility attached to your loan, consider whether you’re using it to its full advantage. Make sure you’re depositing all your income into your offset account, or making any extra payments directly into your loan if you have a redraw facility. You’ll be paying your home loan down more quickly. And this money will also be available in the future should you need it.
Speak to an Expert
Our single best advice when confronted with the question of what to do when interest rates rise, is to speak to an expert. Our experts can help you to find the best loans for your situation. So, you can stay in your home and in the lifestyle you want.
Give us a call today at Lending Loop, and let’s see how we can help!