Trying to predict where interest rates are headed over time can be overwhelming. Even economic experts aren’t always on the same page when it comes to predicting how much the official rate will rise, when it will fall or if it will stay the same. But what we do know is that the RBA has just announced another 25 basis points hike, raising the cash rate to 3.35 per cent, the first for 2023.
ANZ and Westpac have gone on record saying the cash rate will hit 3.85% by May 2023 while NAB has suggested a 3.60% peak by March. CommBank has forecasted a pause at 3.35% in February, however, Deutsche Bank has hinted at four more rises until a peak of 4.1% in August.
If money specialists can’t decide the direction of interest rates, then how can typical first-home buyers and existing homeowners understand what the future holds? Well, the good news is, you don’t have to.
“Interest rates will rise and fall during the life of a loan and savvy homeowners can ride this inevitable wave with more confidence if they plan ahead,” says Landen’s Head of Lending, Ashik Rahman.
What’s next for interest rates?
Although experts aren’t in agreement about when the Reserve Bank of Australia will choose to hit the pause button on the official cash rate, there is one thing they have agreed on – the rate hasn’t stopped rising yet.
“I believe there will be a couple more rate rises before it quietens down. That’s going off the fact that if we look at Australia’s current inflation rate, it’s sitting at 7.8% and they’re really trying to balance that out with the cash rate. So, we can assume at least two more interest rate hikes before people will get a bit of a breather,” Mr Rahman says.
“Even though people will need to account for a few more rises over coming months, there is a very good possibility that if they can ride out these risks then they’re going to come out quite well at the other end when inflation slows and the property market begins to strengthen again.”
How to budget for rising interest rates
“Homeowners (and future homeowners) can prepare for the inevitable through sensible budgeting and a frank conversation with a good mortgage broker,” says Mr Rahman.
“I explain to my clients that even though banks have their own serviceability calculations, those numbers are based on the current market rate which is continuing to change. I will check the lender’s rate sensitivity, so I suggest we look at an interest rate of at least 1% above the bank’s figures and calculate what those repayments would be. Then we go back to your budget sheet and see whether those repayments would fit your lifestyle. If that new number looks comfortable, then I’d say you’re likely to be okay to weather the increase.”
Looking outside your mortgage repayments
Looking outside just your mortgage repayments can also ease the pressure. “Get back to absolute basics, which is household cashflow management. Sit down and look at your budget and find out what surplus is left in your hands every fortnight, or month. Start prepping yourself in a way so that you know every extra dollar that could potentially go towards repaying the home loan. A fresh focus with the right priority will make behavioural change easier.
When to consider a home loan health check
Considering we are in the midst of a rising rate market, there is no time like the present to give your mortgage a check up. As the cost of living pressures mount and the household purse strings get pulled tighter it makes great financial sense to see where savings can be made.
Just as consumers are encouraged to compare health funds and electricity providers on a regular basis, we should all do the same with our home loans.
Although anyone on a variable rate can start negotiations today, Mr Rahman says homeowners on a fixed rate mortgage should not wait until the fixed rate ends. Start your conversations with your lender about three to four months prior to the expiry date.
“This is a great time to speak to a mortgage broker about what products are on the market, but if you want to you do the homework yourself then you should get three different options as well as your existing lender, and then negotiate,” he says. “Remember, lending is about more than just rates, finding the right bank for your circumstances is key.”
“Lately I’ve seen scenarios where new customers are being offered cash back payments and other incentives to change lenders. Banks are coming up with different incentives, as well as discounted introductory rates. They’re trying to capture new clients, so it pays to shop around.”
Get a second opinion
One of the greatest traps homeowners can fall into is staying in an unsuitable mortgage or assuming a lender will alert them to a better offer.
“If you’ve been with your existing lender for some time, and they haven’t taken care of you then you need to have a conversation with them. If they’re still not taking care of you then that’s the perfect time to speak with a mortgage broker and see which bank can take care of you in the best way,” Mr Rahman says.
Visit our Lending page to learn more about Landen’s services or call us to speak to a Lending specialist.