Will interest rates increase in 2017?

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:

 

 Mini house with money on blue

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.

 

Interest Rates

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.

 

Plan ahead

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) douglas.piening@choicehomeloans.com.au 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.

 

Sources:

  1. http://www.domain.com.au/news/the-five-things-on-the-agenda-for-sydneys-property-market-in-2017-20161211-gt8v8g/
  2. http://www.afr.com/news/economy/get-ready-for-2017-reserve-bank-of-australia-rate-hikes-says-oecd-20161128-gsz5k4
  3. http://www.afr.com/real-estate/residential/syd-melb-house-prices-to-rise-but-building-boom-to-end-hsbc-20170110-gtopcs
  4. http://www.abc.net.au/news/2016-12-09/interest-rates-on-mortgages-likely-to-rise/8106180

Should I fix my loan?

Many people want to know whether they should fix (or set) the rate on their home loan, rather than riding the wave of variable interest rate fluctuations. Interest rates fluctuate due to changes in the performance of the economy. The Reserve Bank of Australia meets every month to decide whether the Target Cash Rate or rate at which Lenders access money at Wholesale prices should rise or fall. Lenders then pass some or all of this change onto their customers through variable interest rates.

Fixed rate loans typically work like a long term contract. You fix in a rate for a certain time period, like 3 years, with a fixed monthly payment. There are usually substantial break penalties for ending the fixed loan term.

There are some benefits of a fixed rate loan:

Certainty of repayments

With Fixed Interest loans the repayment amount will not change for the period that it is fixed, allowing the customer to plan and budget with certainty.

Saving money when rates rise

When Interest rates rise (and history will say that eventually they do) then you will save money. With current rates at historical lows, many people are considering fixing their rates.

Case Study of Fixed Loan – Warren

Warren has been saving hard for a long time and has just bought the house of his dreams, using his savings and a 30 year loan for $600,000. He has also recently commenced work on a new IT project which will see his income stay the same for the next few years, so he has decided to enter into a fixed Interest rate home loan for the next 3 years.

The current Variable Interest Rate is 4.9% and Warren has been able to negotiate via his Broker a fixed interest rate over 3 years at 5.00%. 

His repayments will be $3,221 per month (whereas on a Variable Interest Rate the repayment would be $3,184 per month)

6 months later the economy has been booming and Interest Rates have risen so the variable rate is now 5.4%. Warren is still paying $3.221 every month, whilst he would have been paying $3,369 if he was on variable rates, so in this case although he was paying more at the outset now is $148 better off every month.

So in this situation, Warren has done well out of fixing interest rates. On the flip side though, there are of course, potential pitfalls.

You won’t benefit from rate decreases

If interest rates continue to fall, you won’t benefit in the same way as if you had stayed variable. The arrangement is like a long term contract, which you can’t get out of easily or without incurring break costs. There are people who have fixed loans right now that are effectively ‘missing out’ on the latest round of rate cuts.

Less ability to move around

Banks like offering fixed term rate contracts, because they lock customers in. For astute borrowers who may want to shop around at a later date for a better deal, or whose circumstances change, fixing your rate will not provide the flexibility to move without incurring costs.

If you really want to hedge your bets, you can have part of your loan fixed and part of your loan variable. Then you get the best of both worlds, sort of.  If you’re unsure have a chat to your Broker.

 telephone Call Douglas today on 0408 671 524