They say the third time’s a charm, but it certainly is not this time. The RBA made a double hike for the third time and increased the cash rate target for the fourth time this year by 50 basis points. This pushes Australia’s current interest rate to 1.85%.
A 0.50% increase may seem small. Are you sure you can afford it over time? To help you create a breathing room from the choking pressure of the high rates, here are 7 tips that will help you safeguard your savings, repayments and debts.
RBA’s 1.85% interest rate bites Aussies
During the pandemic, interest rates were at historic lows (0.1%). This was thanks to the government’s monetary policy stimulus to support Australians against the global pandemic.
After lifting pandemic restrictions, the economy bounced back, and global factors, such as the Ukrainian war, impacted the country. This signalled the RBA to tame surging inflation rates and the households to brace themselves for higher costs and immense stress.
In the recent statement by the RBA governor, Philip Lowe, he announced that ‘the Board decided to increase the cash rate target by 50 basis points to 1.85 per cent. It also increased the interest rate on Exchange Settlement balances by 50 basis points to 1.75 per cent.’
The huge contrast between the rates during COVID-19 and now shock households as the inflation rate soars to 6.1% and the interest rate hikes to 1.85%.
How do interest rates affect you?
You may feel your mortgage repayments increase along with the pain of the expensive cost of living. 0.5% seems small at first, but in the long run, it’s heavy in your pocket.
Treasurer Jim Chalmers claims, ‘There’s no use pretending that these rate rises don’t hurt; they do and they will.’
For example, on a 30-year loan of $500,000 with a 3.5% rate, the recent interest rate hike changes your repayments from $2,246 to $2,388. This means that you pay $142 more in your monthly repayments and over $51,000 more over the life of your loan.
If you’re worried about your repayments, you can easily estimate how much your rate changes using our repayment calculator.
How much will interest rates rise in Australia?
Managing Director of It’s Simple Finance, Joseph Daoud shares his insights about Australia’s current standing: ‘The outlook is that we are expecting a market correction. The Australian Government is particularly protective of its property and does all that it can to prevent a mass crash as the US does.’
These hiking rates and expensive cost of living don’t mean doom and gloom. Here’s what you can do to protect yourself and your hard-earned money.
7 ways to save more amid high interest rates
1. Negotiate your rate
Have you done a loan health check? The market is highly competitive, so there’s a high chance you’re paying more than you should.
Your lender may offer lower interest rates to new customers to attract them. Try to negotiate with your current lender to lower your rates. If you’ve been responsible, they may grant your request.
2. Shop around for better rates
If your lender doesn’t budge, it’s time to move on. Lenders don’t stay loyal to you, so why should you stick to them?
Switch to a lender that will serve you best. You should compare products from different banks and lenders to see which offers better rates.
Let’s talk numbers. One of our clients had a loan of $600,000 on a 3.39% interest rate, which means $2,969 in monthly repayments. We managed to refinance the rate to 2.59%, so our client now has $2,719 in monthly repayments and monthly savings of $250. Every year, they get to save $3,000 on their loan!
However, switching lenders right away is not always an option when on your own. Get expert advice for free from our lending specialists. We can help you shop around over 40 banks and lenders and lower your rates!
3. Consolidate your debts
Do you struggle with tracking all your loans? Well, this is your solution! If you have a credit card, car or other personal loans, another way to manage your debts is to consolidate them. Debt consolidation simply means you combine your loans into one repayment.
Aside from convenience, this also helps you save money. Unsecured debts, such as your credit card, tend to come with higher interest rates. By consolidating them into one, you save money on the interest you pay for all your debts.
4. Take advantage of offset accounts
If you don’t have an offset account, you may consider opening one. An offset account is usually available for variable rate loans and is directly linked to your home loan. Setting up your offset account reduces the total interest you pay.
The amount in this account offsets the interest on your home loan. Here’s an example for you: If you have $50,000 in your offset account, and your home loan is $500,000, you only pay the interest on $450,000. This means you can save thousands over the life of your loan!
5. Consider your loan options
Are you on a fixed, variable or split loan? Knowing your options and what matches your situation can help you save more than you think. Joseph advises to check ‘what your interest rate actually is.’
A fixed-rate loan means your repayments stay the same for an agreed period while a variable-rate loan fluctuates based on the RBA’s and competitors’ rates.
If you want certainty, you may choose a fixed rate. If you’re after flexibility, a variable rate may suit you. If you want to find a balance, you can split your loan into fixed and variable portions to take advantage of both options.
6. Make additional repayments
Making additional repayments can be challenging, but it’s worth it in the long run. If you make additional repayments, no matter how small or big, you can pay off your loan faster and save money.
Extra repayments mean the principal amount on your loan decreases faster, so you pay less on the interest over the life of your loan. You can also access your additional repayments by opening a redraw facility.
7. Tighten your belt
Have you been to the grocery lately? Have you seen how much your petrol costs? The figures are shocking, right?
If you take action and minimize certain spending habits now, you will be better suited to combat the rate hikes until the economy is vibrant again.
‘Switching from Coles to ALDI is a big step in the right gives direction. Cooking from home and not spending out on food is another. Ensure there is a budget in play to make sure you’re going in the right direction,’ Joseph gives his tips.
Many ask where Australia’s cash and inflation rates lie ahead. ‘The Board places a high priority on the return of inflation to the 2–3 per cent range over time, while keeping the economy on an even keel. The path to achieve this balance is a narrow one and clouded in uncertainty, not least because of global developments,’ Lowe claims.
Don’t panic when you can prepare
With the inflation and interest rates projected to continue climbing in the following months, it’s best to control what you can and stay ahead to manage your finance wiser.
Everyone’s circumstances are different. We’re here to help you assess your situation and give tailored advice that best suits your goals and needs. Get in touch with our expert brokers for a no-cost, no-obligation chat to start protecting your present and best future.
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Want to own your home now? Stay tuned for our upcoming blog about how much you can deposit for your home loan.