Is the low-rate party over?
IT’S been more than 10 years since the Reserve Bank hiked interest rates, but could the days of wafer-thin rates be drawing to a close?
There’s been a fair bit of speculation around possible rate rises in the media lately.
And, with interest rates at record lows, it’s a fair bet the next move will be up – especially as the economy recovers from Covid.
I don’t pretend to know when that will happen, but the Reserve Bank says it won’t raise rates until inflation is holding steady at 2-3 per cent and wage growth is reasonably healthy.
That said, there’s no room for complacency.
Home values have skyrocketed over the past 18 months. That means Australians are taking out ever-increasing mortgages.
The latest housing finance data from the Bureau of Statistics shows the average new home loan Australia-wide is now worth $574,000 – up from $348,000 a decade ago.
In NSW, the average new mortgage is a massive $750,000, up from $382,000 in late 2011.
More worrying, first homeowners – who tend to have very little home equity – are borrowing an average of $467,000 to get into the property market.
Faced with that sort of debt, even a small rate hike can really sting. That’s why it can pay to take action now while rates are still very low.
Let’s look at some possible strategies:
IS IT TIME TO FIX?
COMPARISON site Mozo says it’s still possible to get a one-year fixed rate below 2 per cent.
But watch out for loan fees, which can push the comparison rate (the thing to look at) closer to 3 per cent.
Also, some fixed rate loans offer fewer opportunities to pay down the loan sooner.
BUILD A BUFFER
MAKING extra repayments now while rates are low is an easy way to get ahead with your loan – and soften the blow if rates rise.
If you have an offset account, make the most of it. Have your salary paid into the account to boost the balance, which will help lower the interest component of monthly repayments.
GIVE YOUR HOME LOAN AN ANNUAL REVIEW
CHECK your home loan still offers a competitive rate.
Reserve Bank figures show you could be paying an average of 3.02 per cent on a variable rate loan – or as little as 2.38 per cent if you switch to a new lender.
With banks still offering low-rate sweeteners to their newest customers, there’s no real incentive to stay loyal to your lender.
STRESS-TEST YOUR FINANCES
IF you’re having trouble managing your mortgage today, it’s important to rethink your budget. It could spare you a lot of pain if rates rise.
But I stress that there’s no cause for panic.
In a recent speech, Reserve Bank Governor Philip Lowe said, “The latest data and forecasts do not warrant an increase in the cash rate in 2022.”
But nothing’s set in stone. Taking advantage of today’s low rates can help you navigate a higher-rate world – if and when that happens.