Interest rates have been at historical lows for such a long time, home owners could be forgiven for forgetting what it is like for rates to rise.
In recent weeks though, major lenders have increased their fixed term rates, across several loan terms (two, three and five year terms). A rise in fixed rates usually signals a rise in the cost of funding, which may translate into rises in variable interest rates as well. Westpac, Bank of Melbourne, Ubank and Commonwealth have all increased some of their fixed loan products, some up to 60 bases points higher.
While you probably need a crystal ball to accurately predict if rates will rises or fall, there is increasing noise from some industry experts that variable interest rates will rise in the back half of 2017.*
If this the case, it will be the first time the market will have had a rate rise since November 2010.
Predicting whether the RBA will change the official interest rate requires complex consideration of the Australian economy in terms of inflation, industry sector growth or decline and unemployment or wages growth and the impact of the global economy. Against this backdrop though, there is the school of thought that there is significant risk in a continued lending boom which fuels housing growth and negatively impacts housing affordability.
So if interest rates rise what does it mean for you?
The impact of rate rises really comes down to your individual circumstances. Some of the things you could do to prepare for possible interest rate rises:
Build yourself a buffer
One of the best things you can do to minimise the impact of a rate rise, is to pay off your mortgage faster than your required repayments and build yourself a buffer. That way if rates rise, you are paying less interest from either a reduced principle, or the impact of more money in your offset account. And if you find yourself in need of extra cash to make repayments, you have this available to you. It also gets you used to paying at a higher rate so you don’t feel the impact of any rate rises.
Lock in a fixed rate
This may be an option for you if you want certainty and to hedge your bets against any rises. There are some disadvantages to locking in a fixed rate which you need to be aware of though, you can read more here on fixing loans. Given that fixed rates have already gone up though for many lenders, the horse may have already bolted. I am not the biggest fan of fixed rates but they can provide certainty for a locked in period of time.
It can help to plan ahead to determine the impact on you if rates were to rise on your current loan. Look for an online calculator to see the impact on your repayments if interest rates were to go up, or ask your broker to calculate this for you. Would this amount cause issues with your current budget? Or are there are things that are changing for you in the future that might impact on your ability to pay your mortgage, like a new baby, or a change to your work circumstances? If you think there are things that might impact on your ability to service your mortgage you might want to look at possible strategies, like restructuring your loan.
We will have to wait and see if the predictions are true on rate rises. If you have any questions or need any information on current rates, please get in touch.
You can contact Doug at (e) email@example.com or (m) 0408 671 524.
Douglas Piening is a Mortgage and Finance Broker with Choice Home Loans and is passionate about providing advice you can trust. Whether it’s buying a home, refinancing a loan, investing, building or renovating, Doug brings a wealth of knowledge and expertise to assist with your lending needs.
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This information is of a general nature only and does not constitute professional advice. You should always seek professional advice in relation to your particular circumstances.