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When will interest rates rise

By Ershad Ullah March 3, 2022 | Tags:

There is no way to accurately predict when interest rates will rise but there are signs that a hike may be coming as soon as August 2022. The question on every homeowner, property investor and first home buyer’s mind is -When will official interest rates rise and how should I prepare before it hits?

Covid-19 and the impact on future interest rates rise

Average mortgage sizes are so much bigger today than they were 5 years ago, and the RBA simply won’t need to lift interest rates as aggressively as in the past. So, the total size and pace of future rate hikes is likely to be moderate.

Many families have accumulated significant savings buffers during the COVID-19 pandemic and are paying off their mortgages faster than required by their lenders, and/or have accumulated significant sums in mortgage offset accounts.

What happens to your home loan when the cash rate rises?

  • If you’re on a variable rate home loan and your lender chooses to hike rates in line with the cash rate, then your interest rate – and therefore your monthly mortgage repayments – would increase.
  • If you’re currently on a fixed-rate home loan, your interest rate will not change for the fixed-term duration you have agreed to. However, once this fixed term ends, you may find that your home loan reverts to the lenders’ standard variable rate. This may be higher than your current fixed rate, and your mortgage repayments may increase too.

Tip: If you are already making above-minimum repayments, your lender may not have to increase your actual repayments for some time after interest rates rise.

What’s the difference between Fixed and Variable rates?

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 Interest rises – Investment Property owners

The effect of interest rate rises on property investors could go multiple ways.

Higher interest rates, allied to continually rising house prices and tighter lending conditions, could improve the position of investors against first-home buyers, particularly in regional areas. Higher mortgage interest rates will affect cash flow for property investors but surging rents and larger buffers will help cushion that blow, experts say.

Cash flow is fairly comfortable for most existing investors due to record low mortgage rates and rising rents and some investors will aim to increase their rents when the next rental review comes around.

On the other hand, property investors pay higher interest rates than owner-occupiers, meaning that any hike in rates may hit harder. Investors may have multiple properties and thus multiple home loans, which can compound if repayments go up.

There will be a knock-on effect on people’s ability to borrow as borrowing power is calculated based on the interest rate on top of a borrower’s buffer rate and borrowing capacity may be slightly weaker.

1. Make extra repayments with an offset account

If you’re currently making minimum loan repayments, making extra repayments can help you minimise your loan and reduce the overall interest payable on your home loan. If your lender allows for extra repayments without penalty, then acting now to chip away at your loan principal with additional payments may be worth considering.

  • An offset account is a linked transaction account to your home loan.
  • Unlike extra repayments which chip away at your principal, the funds you deposit in your offset account work to ‘offset’ or reduce the amount you pay in interest.
  • You have the added bonus of being able to potentially withdraw these funds if needed, such as for a home renovation.

2. Switch from a variable to a fixed rate

The idea of switching to a fixed rate is to lock in the good times for anywhere between 2-3 years. It gives you certainty over your repayments and peace of mind if you have other expenses to deal with.

The drawback is that it limits your ability to make extra repayments and the lender will charge you if you decide later to refinance within the fixed period.

Tip: You may be better off switching just a portion of your home loan so you have some flexibility and certainty.

3. Choose P&I over IO repayments

If you have an investment property, you might want to think about switching from interest-only (IO) to principle and interest (P&I) because interest-only rates tend to be much higher than principal and interest (P&I) repayments. They also tend to be the first rates to rise when a hike is around the corner.

Tip: Switching to interest only because you can’t afford P&I repayments is not a good long-term strategy because you end up paying more over the life of the loan.

4. Consider refinancing

If your lender hikes your interest rate past a point that you can comfortably service, and you’ve been repaying your mortgage for several years with some equity built up, it may be worth researching lower-rate lenders.

Refinancing to a lower-rate home loan may be one option to give yourself a rate cut in a time of increasing interest rates. For example, the average owner-occupier variable interest rate in January (paying principal and interest) sat at 3.10%.

5. Don’t live beyond your means

One of the most common mistakes that people make when it comes to preparing for an interest rate rise is that they spend more than they can afford. In the short term, this could see you miss or default on your mortgage repayments.

Over the long term, high living expenses can affect your chances at refinancing your home loan to get a sharper rate.

6. Accessing your redraw facility on a regular basis

Withdrawing extra repayments you have made to your offset is a better strategy than constantly withdrawing from your redraw facility. The fees can be quite high each time you withdraw using your redraw facility, whereas an offset account typically has free withdrawal.

7. Review your loan regularly

Most people are unprepared because they simply get apathetic about their mortgage and forget to check their rate on a regular basis. The fact is that the lender will not notify you when your rate has risen. The simplest step you can take is to call a mortgage broker to find out if you’re eligible for a cheaper rate with another lender.

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