For a long time, Australians have enjoyed super-low interest rates. But that’s now changing, with the RBA hiking the official cash rate in May for the first time since 2010.
With most lenders passing on the 25-basis point rise, concerns have quickly grown about the impact of rising interest rates on household budgets, especially with more hikes tipped for 2022.
Thankfully, there’s lots you can do to ensure you’re not caught out as rates increase. Here are six tips for dealing with higher interest rates that you can use now to put yourself in a solid position looking ahead.
Take a breath and don’t freak out
First off, there’s no reason for alarm. Remember, rates may have risen in May but they’re coming off an all-time low and are still well below levels experienced in previous eras.
What’s more, while rates look to be at the beginning of a hiking cycle, most economists believe it’s unlikely they will reach the lofty heights of other periods such as the 1980s and 1990s.
There’s also wriggle room built into your home loan. That’s because when you took out your loan, the lender stress tested you on a rate that was 2.5% to 3.0% higher than your actual rate. This means your lender knows you can afford an increase.
Once your pulse has settled, it’s time to get prepared for the period ahead. As a starting point, run some calculations to see what your repayments will be at various higher rates.
Nook Money’s Chief Mortgage Broker, Cat Denney, recommends testing on a hypothetical rate of 3%, 4% and 5% so you have a medium-term view of what your repayments could be.
While it’s never easy seeing the higher amounts, Cat says it’s better to know what could be coming than being caught off-guard. Use the Nook loan calculator to work it out.
Reassess your spending
Once you’ve considered the future, now examine your current spending to work out how much extra you have available to put towards higher repayments when the time comes.
Here, Cat says it’s important to be as honest as possible with yourself to get an accurate picture. She says people commonly underestimate livings costs by around 30% to 40%.
“Start by working out your weekly or monthly surplus. If you don’t have one, or if it’s small, look at cutting back on spending or find an extra income source,” says Cat.
“If you need to cut spending, begin by curbing outlay on non-essential items as well as scoping better deals on things like phone and internet plans, and power and gas bills.”
Build a buffer
At the end of the day, the smaller your loan is, the less interest you’ll pay. So, with higher interest rates on the horizon, it makes sense to make bigger repayments now if you can. This will reduce your loan balance and your interest payments.
Alternatively, if you have an offset account, make sure all your income goes through it and work to build it up as much as you can now. This will reduce interest payable when rates lift.
A caveat, Cat says, is if you’re on a fixed rate loan. With fixed loans, you usually can’t make extra repayments, or they’re capped. She urges speaking to a broker about what’s allowed.
Consider refinancing or fixing your rate
Another potential way to save is to consider refinancing, especially with tightening competition between lenders creating opportunities to negotiate.
On this front, variable rates for owner-occupier home loans (P&I) are currently around 2.5% to 3%, so if you’re on a higher rate, refinancing may turn out to be a good option.
If it’s the uncertainty of higher rates that bothers you, then consider a fixed rate loan. With a fixed rate loan you will pay a higher amount — two-year fixed loans are around 4% — but at least you’ll have repayment certainty, making budgeting easier at a turbulent time.
Talk to your broker
With rising interest rates often causing stress and uncertainty, it’s smart not to make any big decisions about your home loan until you’ve spoken to your broker.
Cat says there are many options they can help you explore such as refinancing to a lower rate or consolidating debts to reduce costs and make them easier to manage.
She says brokers can also help people swap temporarily to an interest only loan, review expenses and budget, or support those in financial difficulty work with lenders to understand their options.
Bottom line: your broker has a wealth of tools, knowledge and bank relationships to help you understand your options and make smart choices in the times ahead.