We’ve had it pretty good here in the land of Oz when it comes to interest rate rises. It’s been almost eight years since the Reserve Bank of Australia (RBA) raised the official cash rate (which directly impacts bank interest rates).
As such, many home-owners have never experienced an interest rate rise. But with forecasters predicting we may see one in the next 12 months, this has some homeowners feeling a little antsy.
If you feel this way, here’s the lowdown on all things interest rate rises and what they could mean for you.
Some background about the RBA cash rate
Simply put, the cash rate (or ‘prime interest rate’) is the interest rate all banks must pay on the money they borrow. The RBA cash rate also sets the interest rate on overnight loans in the money market. Right now, the official cash rate is 1.5%.
The RBA may decide to change the official cash rate for a variety of reasons. These include to:
- stimulate the economy
- manage inflation
- control fluctuations in the Aussie dollar
- encourage or discourage consumer borrowing & spending
How a rate change affects your home loan
When the RBA changes the cash rate, lender’s interest rates often move in line with that change too. So if the RBA puts theirs up, the banks put theirs up too (banks also make minor ‘out-of-cycle’ interest rate changes which are outside the RBA’s rate movements).
What this means for you: any change in the official cash rate WILL affect the interest rate you pay on your home loan. If you have a variable interest rate home loan, even the smallest upward movement (think a fraction of a percentage point) can drastically affect your mortgage repayments.
How to prepare for a home loan interest rate rise
While this all sounds a bit worrisome, there are plenty of things you can do to get yourself in a good position before the rate rise hits.
- Switch to a fixed interest rate
With this type of loan, your interest rate is locked in for a certain period so you needn’t be concerned about fluctuations in the cash rate or interest rates. Plus, you’ll know exactly how much your repayments will be during the fixed period.
You could also hedge your bets and opt for a split-loan where you fix part of your mortgage loan and leave the rest as variable.
Both of these options may protect you from interest rate rises in the near future. But you understand you’ll still need to plan and budget for a rise in repayments once the fixed period has ended.
- Pay a little extra each month into your home loan
If you are able, take advantage of the current low rates and make extra repayments. Getting a little ahead on your repayments may mean the slight rise in rates will make less of an impact on your day to day life.
Another alternative is to pop any spare money into a redraw facility or offset account. These loan features reduce the interest you’ll have to pay over the life of the loan.
- Look for lower interest rates now
If your current home loan isn’t competitive, you’ll be left even more out of pocket if rates rise. That’s why it pays to shop around now for a more competitive home loan. If you’re too busy to do this, let us do the shopping for you. After a thorough search, we can present you with a range of offers that may be a better fit for your financial situation and goals.
- Pay down your debts & consider consolidating
It’s a good idea to pay down any other debts you have – such as credit cards – while interest rates are low. Go for the highest interest rate debts first, and then knock over the others.
Should you have multiple debts, you can also consider consolidating them. However, this is not right for everyone, particularly as there are different ways to structure debt consolidation that may not benefit you.
If you’re thinking about consolidating, speak to your broker to get some advice on what is best for your situation.