Mortgage holders in Australia are faced with the unwelcome but not completely unexpected news that they will be paying more for their home loan. In this article we look at what borrowers can do to prepare themselves financially, so they are in the best possible position to meet increased loan repayments.
Following years of low home loan rates, the cash rate is on the move upwards. The truth is that in a normal and healthy economy variable home loan interest rates do sit around 5% – 6%.
However, we’ve all been spoilt over the last decade and got comfortable with extremely low interest rates, with some home mortgage rates even sitting at below 2%.
This low interest rate environment has seen many borrow more than perhaps they normally would just to get a foot on the ladder as property prices across the nation skyrocketed.
Now as we move into the next phase of interest rates, borrowers need to get prepared and make plans for how they will manage their finances for what’s ahead.
So what’s the future hold?
The word on the street is that Australia’s cash rate which each month is set by the Reserve Bank of Australia (RBA) is expected to rise to 2.5% by year-end 2022.
Broadly speaking (rates vary between lenders) by adding 2.5% – 3% to the RBA cash rate one can ascertain what the standard variable rate might be. Therefore, it is not unreasonable to envisage a variable interest rate between 4.5% – 5.5% by mid-2023.
But, as we have all learnt anything can happen and nothing is set in concrete, and it’s important to remember that the RBA will only raise the cash rate as far as necessary to cool inflation.
So, what can you do to cope with future interest rate rises and how can you rejig things to help improve your cashflow and ability to have the money available to fund increased loan repayments?
Here’s what many borrowers just like yourself are doing:
- Contacting their mortgage broker or bank to make sure they have the best interest rate available.
- Changing repayments to weekly. Why? Interest is payable monthly, but it’s calculated daily.
- Revising their current spending habits and immediately removing any identified excesses.
- Curtailing unnecessary streaming services, idol gym memberships and home delivery services.
- Paying off credit card debt because it eats into monthly cashflow due to high interest rate charges.
- Refinancing – using equity in their home to consolidate credit cards, personal loans or other debts.
- Increasing their loan repayments above the minimum to create a buffer as interest rates increase.
- Moving their loans to banks offering Professional Packages to secure a discounted interest rate.
- Utilising Offset accounts to decrease the loan balance on which interest is calculated each month.
There is no need to panic. By arranging a free consultation with your mortgage broker and preparing what needs to be done before interest rates rises impact you, you will be placed in the best possible financial position to confidently face whatever is ahead.
How will interest rate rise impact your home loan repayments?
This table below provides you with an idea of what your repayments could look like should the interest rate you are currently paying increase.
*Interest rate used in the calculations is for illustrative purposes only. Repayments are indicative per week based on a principle and interest loan over a 30 year term.
If you have questions or need assistance to apply for a home loan, want to refinance to improve cashflow or have any questions we are here to help you. You can call us on 1300 888 299, contact one of our brokers who are all listed on this page or you can send us an email and tell us a little about yourself and what you need help with.
General Advice Warning: This blog is not designed to replace professional advice. It has been prepared without taking into account your objectives, financial situation or needs. You should consider the appropriateness of the advice, in light of your own objectives, financial situation or needs before making any decision as to what is appropriate for you.