WHAT GOES DOWN, MUST GO UP…

If you have been a home owner or property investor in only the past 11 years, you are about to experience a new journey of property ownership. Our longer term mortgage holders are well aware of the interest rate roller coaster we are about to ride. However, for many of our clients, this month is possibly the first interest rate rise they have ever experienced.

You can see below that the last time the crash rate (and in alignment, interest rates) increased was in November 2010. That’s over a decade ago!

Most property owners will not see this as good news because of their increased mortgage repayments. However, the upside of rising interest rates indicates our economy is performing well, and the use of monetary policy will ensure this growth is sustainable.

The reality is we are still living in a dream interest rate environment and have been for a very long time. Ask your parents what interest rate they were paying in the late 1980s when they purchased their first home. You may be stunned to hear it was as high as 17%!

Rates were always going to go up – it was just a matter of time. And now it’s here.

We have been receiving calls from worried clients about the recent cash rate rise this month, and consequently, the increases in interest rates and repayments on their property loans.

Firstly – what is the difference between the CASH rate and interest rate?

To put it very simply, the cash rate is the market interest rate for overnight loans between financial institutions as determined by the Reserve Bank of Australia. It is generally referred to as the (near) risk-free for financial institutions.

However your loan interest rate is determined by our financial institution’s cost of borrowing (including deposits and other sources) plus a margin of risk. Their cost of borrowing is influenced by the cash rate as they require a return over and above the risk-free rate.

Therefore, when the risk-free rate changes, it is likely that the interest rate on your loans will also change. As a result, the cash rate and other interest rates have moved in broadly similar ways since at least the early 1990’s

What does an interest rate rise mean for you and your loan repayments?

If your loan is fixed – nothing! Except that you need to start paying attention to where we expect interest rates to go and start planning for when your fixed interest period ends. It is extremely likely your repayments will increase when moving into a variable rate.

If you have a variable interest rate, then almost certainly your monthly repayments will increase as of this month.

Below is a table of how each 25 basis point increase will affect your current repayment each month.

Per month*

OR if you budget week to week, it looks like this:

Per week*

*Based on a 25 year principal and interest loan.

Predictions about cash rates rises:

There are many opinions about how fast and how high rates will increase. There is simply too much to take in. One thing that’s fairly certain is that rates will continue to rise this year, and no doubt into 2023 and potentially 2024.

As we do not have an interest rate crystal ball, we do need to advise that NOW is the time to prepare for those rises.

Start looking at how you can save your future monthly commitment now by cutting down on those unnecessary items as soon as you can.

The next few increases should be manageable for most, but not too far into the future you will need to make some serious decisions about your spending habits. Especially those with larger mortgages.

If the predictions are correct, you need to scroll down that final column to see what impact and additional cashflow you will need to allocate in addition to your current mortgage. This is likely where most commentators believe the interest rates will be in 12 months’ time.

And you were thinking of fixing?

Well for those who missed our months of warnings and encouragement to fix, you may have missed the boat.

Fixed interest rates have been creeping up over the last 6-9 months and those who were quick off the mark 12 months ago have locked in at 2% or under.

With most majors, fixed rates from 1 to 5 years are now approaching 4% to 5% depending upon the period.

With many variable rates still in the low 2% range, interest rates would need to increase by a reasonable margin before you would benefit from locking in your interest rate now.

Actions for you…

1. Now more than ever you need to look at your spending habits and start tightening them – cut costs where you can.

2. Plan of the inevitable rises ahead of time, perhaps even increase your mortgage repayments now and get ahead on your loan.

Remember, when we arranged your finance, the lender already included in your serviceability at least a 2.5% rate increase (called your interest rate buffer).

Therefore, it is likely to assume that you can manage total increases of up to 2.5% or they would not have allowed you to borrow.

If you are concerned, then we encourage you to book a call with us to work on a plan together.

Stay focused, plan ahead and remember – we are always here to help.

With your best interest always in mind…

If you'd like help with assessing your personal and financial situation, as well as comparing the loans in the market to see if you're truly getting the right deal for you, then call Bob Malpass now on 0431 862 136, email [email protected]

Thanks for reading

Bob

Sources

1. RBA.gov.au

Note: Most people will have their current loan services at the 2.5% buffer, however please note the rate has since increased to 3% as of October last year, 2021

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