Can you afford another 0.50% increase this month? Brace yourself for growing pains as you feel more pinch in your pockets. The Reserve Bank of Australia just hiked the cash rate target again by 50 basis points, leading Australia’s current interest rate to 2.35%.
With the rates going higher, financial inconvenience can turn into an emergency if you don’t make the right decisions. So, here are 6 things you can do to take control of your loan.
Why did the RBA increase the interest rate?
The RBA has raised the cash rate by 200 basis points since May 2022. Aside from the cash rate, many factors affect the interest rate in Australia. For one, the inflation rate reached an all-time high of 6.1% – the highest in 21 years.
RBA governor, Philip Lowe, pinpoints that ‘the Board is committed to returning inflation to the 2–3 per cent range over time. It is seeking to do this while keeping the economy on an even keel. The path to achieving this balance is a narrow one and clouded in uncertainty, not least because of global developments.’
What does the RBA interest rate rise mean?
For borrowers, especially those with variable-rate loans, this means higher mortgage payments. To give you more idea of what the 0.5% increase means, let’s look at how your repayments can change if your lender passes the entire rate rise.
Let’s say that your rate goes from 2.75% to 3.25% after the announcement. Here’s how your monthly repayments will change:
|Loan||Before rate increase||After rate increase||Increase in monthly repayments|
*Estimated based on a principal and interest owner-occupier loan with a 25-year loan.
With the skyrocketing cost of living, these additional monthly repayments will make it even tougher for households to make ends meet. This makes you vulnerable to mortgage stress, which happens when more than 30% of your income goes to home loan repayments. You can easily estimate how much your repayments will change using our loan repayment calculator.
But every cloud has a silver lining. For first-home buyers, this may be the best time to crack the property market as we are now in the buyer’s market, which means you have the upper hand.
Based on CoreLogic’s latest Home Value Index, ‘Down -1.6% over the month, the national index recorded the largest month-on-month decline since 1983’ with Sydney leading the downturn ‘with values falling -2.3% over the month, however weaker conditions in Brisbane accelerated sharply through August, with values falling -1.8%.’
With the rents soaring high across Australia, now can be a great time to secure your dream home instead of paying high rent. Aside from being in a buyer’s market, you may also qualify for first-home buyer grants and schemes that allow you low deposits and give you a leg up the property ladder!
To weather the storm, here are 6 keys to protect your home and budget despite the high interest rate:
- Check your rate: The first step you should take is to understand and check your rate. This gives you a clearer idea of what your next move should be and have control over your loan.
For example, you may be unaware that your lender charges you a higher rate or that you’re paying for home loan features you’re not using. Reviewing your loan and figuring out these things can help you make the right adjustments to save thousands on your loan.
- Negotiate with your lender: If you check your rate, chances are you’re paying too much. Keep an eye out as you may be paying loyalty tax, which refers to higher interest rates that existing customers pay compared to new customers.
New research found that staying loyal to your lender can cost you an extra $70,000 over the life of your loan. One thing you can do is call your lender and negotiate your rate. If you’ve been a good customer, they may let you off the hook and grant you a lower rate.
- Refinance: If your lender doesn’t budge, don’t be afraid to make the switch. The property market is very competitive, so refinancing your home loan to a more competitive rate can save you thousands.
One of our clients had a loan of $600,000, and here’s how our client saved $250 per month after refinancing with us:
If you need help with refinancing, you can easily book an appointment with our expert brokers at your most convenient time. You can even choose the best loans from 40+ banks and lenders that match your situation.
- Consider fixing your rate: If you feel uncertain and worried about where the interest rates are heading, you can consider fixing your rate. Fixed-rate loans tend to have higher rates, but they give you security and control over your finance. This type of loan allows you to lock your repayment rates for a period (usually 1-5 years) in case the rates go higher in the coming months.
Another option is to split your loan into fixed and variable rates. This way, you benefit from the certainty of a fixed rate and the flexibility of a variable rate.
- Make the most of your offset account: If you have extra savings, and you have an offset account, take advantage of it if you can. An offset account is linked to your home loan and allows you to reduce the interest charged on your loan.
Not quite sure how it works? Let’s say you have a loan balance of $500,000, and you deposit $20,000 in your offset account. Your lender only charges the interest on $480,000 rather than $500,000. This way, you save on the interest, and you can pay off your mortgage faster!
- Build your savings: If you don’t have an offset account, you may also try investing your money through term deposits. This account allows you to save higher when the interest rate is high. But before you commit to term deposits, keep in mind that this option locks your savings for the term you choose. So, evaluate your situation first before taking a leap.
‘The Board expects to increase interest rates further over the months ahead, but it is not on a pre-set path. The size and timing of future interest rate increases will be guided by the incoming data and the Board’s assessment of the outlook for inflation and the labour market,’ tips the RBA.
Not sure what to do after the RBA’s announcement?
All arrows point to higher interest rates in the coming months, so you should act fast. It’s no secret that home loans can be tricky, so controlling what you can saves you from stress and higher repayments.
Get in touch with our trusted brokers to get the expert help you need. We can assess your situation, negotiate with your lender and help you choose a better loan tailored to your goals and needs.