The 1.1 million Australian mortgage holders who have taken out a home loan over the past 11 years have only seen interest rates head in one direction – until now. In May 2022, the Reserve Bank of Australia put the official cash rate up by 0.25% to 0.35%. With rates now tipped to slowly climb for the rest of the year (and possibly into 2023) a new generation of borrowers will need to get financially savvy to stay on top of repayments.
Where are interest rates heading?
After 18 consecutive cuts, the RBA dropped the official rate down to a record low of 0.1% in November 2020. Although many industry insiders knew a rate rise was on the cards, a short time ago, in late 2021, many forecasters, including the Governor of the RBA, anticipated there would be no rate movement up until at least 2023 or 2024.
But the cost of living in Australia is rising fast and with higher-than-expected inflation figures the RBA is now seeking to cool the economy by raising interest rates. Experts are now predicting at least four more hikes in 2022 and the RBA is expecting the cash rate to peak at 2.5% by the December quarter of 2023. While it will be a significant increase compared with the recent all-time low, it’s important to put this in perspective. It’s still well below the 3.5% rate of 10 years ago and dramatically lower than the 17.5% experienced in 1990.
How do rising interest rates impact my mortgage?
The recent change in the official cash rate (and subsequent increases by individual banks) highlights just how important it is to understand your cashflow and financial flexibility. It’s also a reminder to ensure your lending plans are based on reasonable borrowing and servicing capacity.
Instead of worrying about more rate rises on the horizon, it’s the perfect time to take stock of your current lending landscape. Whether you do it yourself or talk to a mortgage professional, carefully consider what rate you’re paying now, and how changes may impact your short-term and long-term needs. Consider your personal lending structure and how each of these factors could be impacted by future rate increases.
Owner occupiers and investors have different needs when it comes to mortgage structures. The deductibility or non-deductibility of a loan will have a significant impact on the strategy you adopt. An owner occupier may be focused on cashflow only, whereas an investor should seek a loan that compliments their cashflow, capital growth and tax strategy.
Many investors hold properties inside superannuation – with few lenders in this space, the lenders can become complacent, and rates can become uncompetitive. A lot of Investors also hold properties with lending tied to their owner occupier property or hold investment properties that were previously their home. When investing or changing the property purpose it is important to consider the loan structure.
No matter if you are an Owner occupier or Investor, when circumstances change but mortgages don’t, borrowers may find themselves paying more than required, or their lending structured in an inefficient way, costing them both money and opportunities.
How do I manage the rise in interest rates?
Mortgages might come with 20, 25 or 30-year loan terms, but that doesn’t mean the structure has to stay the same. Today’s home loans are relatively fluid and can be adjusted strategically to suit your needs. Working out the right structure – whether there is an offset facility, a variable rate, fixed rate or both (also known as a split loan), Principal and Interest or Interest Only – is something that can be discussed with your lender or broker to maximise your lending opportunity, reduce interest and tax exposure and improve cashflow.
Consider a home loan health check
As circumstances change, so should your mortgage. An annual home loan health check is a great way to find out if you’re paying too much, if you can get a better deal with your current lender or another institution.
Your finance broker can do a full home loan health check to discover if your mortgage is still as competitive as it should be and if it’s suited to your individual needs. A mortgage ‘health check’ shouldn’t cost you anything, but could save you thousands. If you continue to improve your home loan features and keep your annual fees and interest rate as low as possible, your repayments will be more manageable. Ultimately, a healthy mortgage means you could pay your loan faster or take out additional finance, consolidate other debts, borrow to renovate your dream home or even purchase an investment property.
During a home loan health check be sure to ask;
- Am I paying an unreasonably high interest rate?
- Are my fees too high?
- Am I getting the best service?
- Does my loan give me the features I need?
- Am I paying for features I don’t use?
- Have my financial circumstances changed?
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