Interest rates are all anyone can talk about, with speculation swirling about when the Reserve Bank of Australia (RBA) Board will increase the cash rate, which has just happened!
The Reserve Bank of Australia has lifted the official cash rate for the first time in nearly 12 years since November 2010.
At its meeting on Tuesday the 3rd of May, the RBA board decided to increase the rate by 25 basis points from a record low of 0.1% to 0.35%.
This decision has been made partly based on the current unemployment rate of 4%, which is expected to be further declined to around 3.5% by early 2023. Also, an inflation rate of 5.1%, the highest it had been in 21 years meant the central bank left no choice but to lift rates.
So, what does this mean for borrowers?
With interest rate rises on the horizon, borrowers should be prepared for, rather than fearful of, increasing mortgage repayments.
For some borrowers, this may well be their first-ever rate rise – but many of those property owners have also experienced once-in-a-lifetime increases in the values of their homes or investment properties over the past year. Property buyers who purchased prior to the pandemic could well be better off by hundreds of thousands of dollars, with investors also benefiting from strong rental price growth over the same period. This means that their overall net worth may have put them in a far better position than if they had never purchased because of an unrealistic fear of interest rate rises, which is a normal part of monetary policy.
Another important fact to note is that borrowers also already had a built-in financial buffer because mortgage brokers and lenders had been assessing their serviceability using an interest rate that is 2.5% or 3 % points more recently than the actual rate on their mortgage – the equivalent of 10 to 12 increases of 25 basis points. No one is expecting interest rates to rise rapidly. It appears more likely that we will see incremental increases of 25 basis points over a number of months. It’s also vital to understand that interest rates have been at record lows for more than a decade since GFC (global financial crisis started from USA sub-prime mortgage crisis) in 2007 well before the pandemic arrived on our shores.
Now, what can you do as a borrower to prepare yourself for potential rate hikes?
If you have a home loan and you haven’t checked out its finer details in the past year, now is the time to do so. Many banks may offer new customers a lower interest rate than they do their existing borrowers, so that means your deal from two years ago may not be the best one now. Speak to your broker to find out what the changes to your repayments would be when rates rise.
Once you know how much the difference is, look at your budget to find ways to set this money aside now. This may help you to know you can afford the repayments when rates rise, and if possible you’ll allocate and build up an extra budget to help you deal with any additional rate increases when they flow through.
Your broker can then review the suitability of your current mortgage in relation to the rate change and your personal circumstances, and compare it to other products on the market. Your mortgage broker may be able to identify the most suitable option for you.
Change is certainly in the air, but there is no need to panic. Reach out to Jenice Lee for guidance during this time.
Jenice Lee at Finance Star is MFAA approved finance broker and is not your average mortgage broker.
Contact us if you want to find out more about how we can help with your finance options.
FINANCE STAR Credit Representative Number 529071 is authorized under Australian Credit Licence Number 389328.
This article provides general information only and has been prepared without taking into account your objectives, financial situation, or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. It does not constitute legal, tax, or financial advice and you should always seek professional advice in relation to your individual circumstances.
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