With three months of successive rate rises, and more predicted to come throughout 2022, household budgets may be starting to feel the pressure of a changing economic environment.
Following the successive 50 basis point rate rises in June and July, the current cash rate now sits at 1.35%. Up from its historically low of 0.1%, where it stayed for some years.
Interest rate rises are the means used by the Reserve Bank of Australia (RBA) to help curb inflation which we know is on the rise, as well as the cost of living. So what can we expect for the rest of 2022 and how can you as a borrower manage the impact on your household budget?
What impact will the last rate rise have on your loan?
As it currently stands, if you have a $600,000 home loan, the rate rises so far this year would have bumped up repayments by $420 a month or $5,100 a year, based on the average interest rate in the market.
With all big four banks passing on the interest rate increase in full, now is the time to start considering what further rate rise could mean for you and your family.
Are more rate rises on the horizon?
The Reserve Bank Governor, Philip Lowe recently said that any future interest rate rises will be guided by the board’s assessment of the outlook for inflation and the labour market. He suggested that it would be some time before we can expect to see inflation return to target levels and he expected inflation to peak later this year. Before it then declines back towards the 2–3% target range next year.
All of this suggests that further interest rises are likely in the coming months of 2022.
In the Australian Financial Review recently, a survey of 32 economists provided their predictions on what would happen to the cash rate by the end of 2022. Most of them believed that we could see the cash rate rise to between 2.2 – 2.6 per cent.
With more recent predictions this week from ANZ suggesting rates could rise to 3 per cent before Christmas.
Regardless of what prediction ends up occurring, there is no doubt further rate rises are to be expected in the coming months. What this means in real times for those with a mortgage is that this will likely push the average interest rate that home buyers are paying to more than 5%p.a. Something we have not seen for a number of years.
How can you combat the increasing interest rates?
The good news is that if you have applied for a loan since October last year, the Australian Prudential Regulation Authority (APRA) has already made a move in anticipation of interest rate rises. At that time they increased the minimum interest rate buffer it expected banks to use when assessing the serviceability of home loan applications. So this meant that lenders had to assess already a borrower’s capacity to service a loan at least 3% higher than the product rate.
So while the media is making a lot of noise around rising interest rates, you as a borrower can be on the front foot now to prepare for the coming months and into 2023. Start to focus on sticking to a budget, reducing your expenses, and ensuring you can stay on top of your repayments.
Some of the top ways you can take control of your loans include:
- Making additional or more frequent repayments if you can afford to now to help you have a buffer and prepare for future rate rises. It can be helpful to work out what the repayments on your loan would be if the interest rate increased and look to start paying that higher repayment from now.
- Changing your repayment schedule from monthly to weekly or fortnightly.
- If you have the means to do so now, look to start paying more than the minimum and until you can’t, look to maintain the difference as interest rates increase. Of course, this will depend on whether you can maintain the additional repayments as interest rates continue to rise but by starting now you can build up a bit of a buffer for peace of mind.
- Getting in touch with us to see if you are on the most competitive interest rate for your needs. There are still some good rates on offer and as a mortgage broker we can help you find these nuggets of opportunity that still exist.
- Using an offset account to help reduce the amount of interest you pay on your loan.
- If you have multiple personal debt, maybe a debt consolidation and option.
There is no doubt some extra strain will be put on family budgets over the coming months. But rather than burying your head in the sand until the rate rises happen, now is the time to take control, stay positive and be on the front foot.
As your local Melbourne mortgage broker, I’m here to help you make sense of interest rate rises and how they could impact you and your family.
Let’s set up an appointment and chat about your options and how we can help you navigate the interest rates rises of 2022.