Following a challenging year for the housing market and a slow start to 2019, the RBA announced that cash interest rates would remain at 1.5%. This marks the 30th consecutive month that interest rates have remained at a record low rate, with the last change in August 2016.
While interest rates have remained unchanged for over two years, economists predict that there will be an interest rate hike at some point in the later half of this year or, at the latest, early next year. A change in rates will most certainly have an impact on the housing market, both for current borrowers and for those looking to buy.
So what does an interest rate rise mean for you, and how can you prepare?
Firstly, how will an interest rate rise affect home loan rates?
If the RBA increases interest rates, interest rates on home loans will also increase. This means you’ll either end up having to take more time or make higher repayments to pay off the extra interest, and you may not be able to borrow as much as before. How to prepare for an interest rate rise: secure fixed rate home loans When the interest rate is high, variable home loan interest rates might seem preferable as you may be expecting rates to go down over time. On the flipside, if the RBA is expected to hike up interest rates, it’s better to secure a good rate now while you can.
For new homeowners, try to choose a fixed rate loan in order to secure a low rate for as long as possible. You can fix your home loan for a set length of time, usually between 1 and 5 years (although some banks offer 10 year terms) – this way you’ll know exactly how much to budget, and any future rate hikes won’t affect you. However, with fixed rate loans it’s important to note that you’ll be limited in terms of extra repayments, as many banks have a maximum amount you can contribute per year.
For those who already have a home loan, you can either fix part of your current home loan, or shop around and look fixed rate home loans with your current bank or other banks. Just remember to do due diligence before switching: check for any exit or break fees, and see if you’ll need to pay lender’s mortgage insurance again with your new provider.
Shopping around: compare home loan interest rates to find the best deal
As banks prepare for a possible interest rate hike, many have already raised their home loan interest rates as a precautionary measure, with more rises predicted on the horizon. In this environment, it’s more important than ever for borrowers to do their research to find the best deal available.
“At a minimum, you should be reviewing your home loan at least yearly,” said Mitchell Watson from Canstar. “If your comparison rate does not start with a three, you’re paying too much.”
Research the rate your lender is offering for new customers, and see how this stacks up to your current home loan rate; if the rates are lower, you can ask your bank for an interest rate reduction based on this pricing. You could also threaten to leave and see if your lender offers you a lower rate as a retention rate.
If you’re in the market for a home loan, use a comparison website or speak to a mortgage broker to ensure you’re aware of all the options on the market, and choose the one that’s most suitable for you.
Plan ahead: increase your mortgage repayments
Many economists predict that home loan interest rates will remain low for the first half of the year, which means there’s still time to get ahead on your mortgage. By planning ahead and making extra repayments now, you can reduce the total amount that you owe and pay less in interest on future repayments, even if there’s an interest rate hike.
If the thought of making extra repayments as a lump sum is financially daunting, there are still other ways you can increase your repayments. If you’re making monthly repayments, consider switching to fortnightly repayments – you’ll make an extra month’s worth of repayments every year as there are 26 fortnights in a year versus 12 months. Alternatively, you can put savings into an offset account; this way, your savings are deducted from your mortgage balance, and you only pay interest on the net amount.
Dealing with an interest rate rise requires planning, and the sooner you start thinking ahead, the better. Keep an eye on the latest news and trends in the housing market, and you’ll be better equipped to deal with any changes in interest rates, whether it comes this year or in the future.