Getting prepared for rate rises

The Reserve Bank of Australia (RBA) hasn’t announced any changes to the cash rate for a year now, leaving the rate at a steady 1.5 per cent, with most lenders keeping rates low too. However, there is talk in the market of of rate rises in the near future, so it’s best to be prepared if and when this does happen.

Here are a few things to look for to help you get prepared for future rate rises:

  1. Lock in your rates.

Reviewing your home loan interest rate and fixing either your whole loan or a proportion of your loan will provide you with certainty on your monthly loan repayments throughout the fixed period.  While this type of loan is more restrictive than variable rate loans, many lenders have dropped the rates for their fixed rate products, making them more attractive than ever.

Remember, if interest rates rise during your fixed rate period, your interest rate will increase once the fixed rate period is over. It’s important to plan ahead and ensure you can still afford the loan after the rate rises. Speak to your mortgage broker about your options.

  1. Budget, budget, budget.

An easy way of helping prepare you for future rate rises is putting together a budget of your current day-to-day living expenses. Remember to include food shopping, utilities, entertainment, motor vehicle costs, insurances and also make allowances for unexpected events such as home repairs or medical emergencies.

Once you have identified what you can afford to pay on your home loan, you will be able to determine whether you would still be comfortable meeting your loan repayments if interest rates increased. As a rule of thumb, we recommend clients budget to allow for a 2% increase.

  1. Pay off your loan sooner.

Making larger repayments to your loan in a low rate environment means that more of your money is paid on the principal of the loan, than on interest.  This will allow you to potentially pay off your loan sooner and save on interest. Keep in mind though that this generally applies only to variable rate loans. Speak to your broker about whether your loan allows you the flexibility to do this.

If you or someone you know is concerned about future rate rises, or you would like to discuss your home loan options, get in touch with one of our brokers today.