The Reserve Bank Speculates a Cash Rate Rise in 2022 is “Plausible”
If you’ve been reading the finance section of the papers, you’ll have noticed speculation about the Reserve Bank of Australia (RBA) increasing the official cash rate (OCR).
What the RBA says
Having previously remained tight-lipped, the RBA governor, Philip Lowe, now concedes a cash rate rise this year is “plausible”.
“Interest rates will go up, and the stronger the economy, the better progress on unemployment, the faster and the sooner the increase in interest rates will be,” he said.
What lenders say
Economists at the big four banks expect a rate hike soon, with Westpac and CBA predicting the first increase in August 2022, followed by ANZ in September, and NAB in November.
Here at Nectar, we don’t have a crystal ball, but regardless of what the future holds, it’s worthwhile reviewing your finances from time to time to ensure you’re in a solid position.
How Do I Prepare For Rising Interest Rates?
Firstly, keep calm – you have buffers in place
Interest rate increases are the exact reason why lenders use serviceability buffers. Currently, for loan approval, a lender must determine that you could still make (‘service’) loan repayments at three per cent higher than their actual market rate. This means that small, gradual increases in rates should be manageable for most.
However, these buffers can’t account for all of life’s changes. If you’d like to take extra steps to put your mind at ease, here are some other options:
1) Book in a mortgage review
If it’s been a while since your last interview, two things have probably happened:
- Your property value has increased.
- You’ve been lowering your total loan amount through regular payments.
These factors combined may have reduced your loan-to-value ratio (LVR) enough to refinance to a lower-interest mortgage. This may also be a chance to include or exclude loan features that better fit your current financial situation.
2) Look at your spending
If your expenses or spending habits have crept up since you first took out your mortgage, now could be a good time to see where you could tighten the purse strings, just a tad.
3) Consolidate debts
If the OCR rises, it will affect all types of lending, not just mortgages. So, if you have other debts from credit cards, vehicle and personal loans, you could consider consolidating them into one loan at a lower rate. You would save on repayments and offset some of the impact of a rate rise.
First Home Buyers
Of course, a rate rise doesn’t just affect current homeowners. Rising rates will reduce the amount first home buyers can borrow. If you’re working towards your first home, the suggestions above are just as appropriate for you, and will help you get in a better position for mortgage approval.
Is Now a Good Time to Fix Your Mortgage?
There are pros and cons to taking out a fixed rate in any scenario. If you’d like to discuss a fixed loan, please get in touch.
Pros
- Peace of mind – your repayments don’t increase if the OCR rises.
- Better for budgeting – know exactly what your monthly repayments will be and what’s left over at the end.
Cons
- Repayments don’t increase if the OCR falls.
- Break-fee penalties may apply for changing the loan before the term expires. These costs are usually only visible after the request to change/ close the account is made and can range from nothing to thousands of dollars.
- Usually less flexibility to add features (redraw facility, extra repayments, ect) than variable loans.
Most fixed rates are for 1 to 5-year terms. Usually, if banks expect the OCR to rise, their fixed rates will be higher than their variable rates, and the trend we’re seeing right now is that the longer the term, the higher the rate.
In a nutshell, being prepared for interest rate rises is about being comfortable with your buffer. If you’re not, get in touch with me and we can talk through your options.
