RBA raises rates - the world doesn't end - READ THIS - 4th May, 2022
To help put things in perspective, below are some basic truths to be aware of:
The interest rates we have been enjoying for the past few years were unprecedented and were never going to last for long
Only 3 short years ago, the average home loan rate was in the mid to high 3’s
With a 0.25% increase, we are still at record low interest rates
There will be further rate increases, as there will be wage growth to help offset these increases
Banks do not follow the RBA point for point – prepare for increases above the 0.25% handed down today
Banks will pass on different increases at different times. Some may pass on just the 0.25%, others may go higher. There will likely be different increases for different loan types and different increases for existing and new loans. Maybe not so much on this first round of increases, but certainly for future moves
Now for the important thing – What do you do?
Firstly, there’s no magic here – if your rate increases, so does your interest charge, so do your minimum repayments. A 0.25% rate increase will add around $21per month per $100,000 (so, if you have a $500,000 home loan, your minimum repayments will increase by around $100pm)
You can, however control the impact with good advice and a little bit of forward planning.
Below are our suggestions of what you should be considering:
If your loan is currently fixed, your repayments won’t change until the expiry of your fixed term. HOWEVER, once your fixed rate term expires, your repayments will adjust to the prevailing rate of the day. The risk here is that the longer your term, the greater the eventual increase will be. Most fixed rate home loans allow you to make extra repayments up to a certain amount without penalty. You may want to consider preparing for the inevitable by increasing your regular payments now. Keep in mind that any extra payments that you make will be locked away and not able to be redrawn until at least after your fixed rate expires.
If you home loan is currently variable, your minimum repayments will increase. This will happen automatically.
Check your current home loan rate:
If your LVR is less than or equal to 80% and your rate is around the mid 2’s or less then you are bang on and there is no need to change anything
If your LVR is less than or equal to 80% and your rate is higher than the mid 2’s then it will be worth have a look at it. Contact us and we’ll review your position and advise you accordingly
If your LVR is greater than 80% and your rate is in the low 3’s or less then you are bang on and there is no need to change anything
If your LVR is greater than 80% and your rate is higher than low 3’s then it will be worth have a look at it. Contact us and we’ll review your position and advise you accordingly
Prepare for future increases now. If you are making only the minimum repayments, you should consider getting ahead of the curve and increasing your repayments beyond the minimum. You can progressively increase your repayments to suit your budget and all extra payments will provide you with a buffer of available cash (if your loan is variable)
Resist the knee jerk reaction to immediately and blindly refinance to try and beat the increases. Shifting loans frequently in a rising rate market never pays dividends – it’s false economy. Certainly you do need to keep an eye on things, so use the guide above to see if you should be considering a move at this early stage. We have extensive experienced in a rising rate market and can help you make the most appropriate decisions to help minimise the impact and get your home loan reduced or eventually gone much sooner than you will without experienced advice and guidance.
What about taking a Fixed Rate now? Taking a fixed rate loan now is not even on the table. Fixed rates began to push up late last year and are now far too high to consider at this time. Short term fixed is well into the 3’s and longer terms are around mid 4’s. The conversation around fixed will probably become a relevant conversation in the future, but certainly not now.
Finally, try not to get too caught up in news stories, especially those which start with “experts say”. The world isn’t going to end, the country isn’t going to go bankrupt, millions of people aren’t going to have their homes repossessed and first home buyers aren’t going to be locked out of the market forever. The world will go on as it always has. The bottom line is that the global economy is an infinitely complicated beast which can dramatically turn on a dime. Those who remember the GFC and us oldies who were around to witness the crash of ’87 and subsequent ‘recession we had to have’ (if you’re under 50, ask your parents about that one 😉) have seen it many times before. For the younger crowd, the last two and a half years have highlighted just how volatile this beast can be and equally just how robust it is. The cold hard truth of the matter is NOBODY knows what’s going to happen next. The best defence to financial stress is to be educated and be prepared.
Now that the RBA has moved on the official cash rate, you will be inundated with stories with all sorts of predictions, analysis and more than your fair share of "Doomsday Merchants”. The media is going to have a field day with this.
The first thing I will say to everyone is DON’T PANIC!! Everything is going to be just fine.
We have not seen an interest rate increase for 11 years. Many homeowners have never experienced a rate increase. Many Brokers have no experience in a rising rate market.
We have……….. many times and we’ll be happy to guide you through it.