The RBA just lifted the July cash rate target to 1.35%, putting more pressure on the cost of living, household expenses and loan repayments.

When was the last time you did a rate check/lender comparison? You may need to tighten your belt and check your finances to ensure you’re not overpaying on your loans.

What’s happening with the RBA’s interest rates?

In his interview on 14 June with ABC, the RBA governor, Philip Lowe, warned that it might be reasonable to assume that ‘the cash rate gets to 2.5 per cent at some point and I say that because the midpoint of our inflation target is 2.5 per cent.’

As predicted, this afternoon, Lowe announced that the RBA decided to add 50 basis points to curb inflation, bringing Australia’s interest rate to 1.35% from 0.85%.

‘Global inflation is high. It is being boosted by COVID-related disruptions to supply chains, the war in Ukraine and strong demand which is putting pressure on productive capacity. Monetary policy globally is responding to this higher inflation, although it will be some time yet before inflation returns to target in most countries,’ said Lowe.

Here’s what you can do

We laughed a little, but in reality, cried on the inside (and continue to do so) with the cost of lettuce hitting an all-time high! One thing is for certain: As rates continue to rise, so does the cost of mortgage repayments. Not all’s lost. Here are some tips to ease some burden from your shoulders:

ENTER THE PROPERTY MARKET

With another rate hike from the RBA, it may be another chance for first-home buyers to get into the market.

Since COVID-19, the record-low interest rates favoured sellers and drove housing prices upwards due to the demand and the fear of missing out. However, with the recent interest rate hikes and decreased borrowing capacity, housing price growth extremely slowed down and fell for the first time in May 2022 since the pandemic and continued to drop this June.

The rate hikes decrease the borrowing capacity of professional investors, so competition eases, the market shifts to buyers, and it allows first-home buyers to enter the market at a lower price point.

Moreover, in a June 2022 Economic Insights: Global Economics & Markets Research report, CommBank Research stated, ‘Based on our updated forecast for the cash rate we expect home price falls nationally of around ~15% over the next eighteen months. Prices in Sydney and Melbourne are anticipated to decline by more than the other capital cities… The expected falls in home prices are significant.’

Here’s the catch… Cooling markets also come with a price

Getting your first home is still an expensive Australian dream, and you should also consider the increase in borrowing costs and mortgage repayments that come with the rate hike.

On the bright side, you can look into government initiatives that may help ease the burden. For example, the First Home Owner Grant provides one-time cash assistance to first-home buyers who meet certain eligibility criteria. Then, the First Home Guarantee (previously FHLDS) allows a maximum of 35,000 first-home buyers to deposit as little as 5% without paying the lender’s mortgage insurance.

Talk to our brokers for free, and they may help you know more about the grants, schemes, and buying process that might help you enter the property market while minimising the impact of the rates.

CHECK YOUR LOAN RATES

From last month’s interest rate hike, some borrowers with variable-rate loans are probably experiencing higher rates on their repayments. When was the last time you checked and compared your loan rates? Is your loan rate still competitive?

A fixed-rate loan means your repayments stay the same for a predetermined period while a variable-rate loan can fluctuate depending on the RBA’s cash rate target and competitors’ rates. To help you have an idea about these options, we narrowed down some advantages and disadvantages that you may consider:

Fixed-rate loan

Considering the market and cash rate expectations, some banks increased their fixed rates before the RBA’s July announcement. On 30 June, CBA hiked its fixed rates by 1.4% for owner-occupiers and investors. NAB followed along on 1 July and announced a hike of up to 1.1% for owner-occupiers and investors.

‘Those who decided to fix their loans last year are in a much better position as the cash rate was much lower. However, the repayments are going to definitely increase, and many banks are starting to hike up their rates,’ said Daoud.

If you secured lower fixed interest rates before the rates started increasing, consider yourself lucky. However, if your agreed term is nearing the end, keep in mind that the rate will revert to the standard variable rate.

A. Advantages

1. Simpler budgeting. A fixed rate offers certainty because it makes your budgeting simple since you know how much your repayments are for the fixed term.
2. Protection from rate hikes. If the official interest rates significantly increase during the fixed term, your repayments won’t be affected.
3. Peace of mind. You won’t have to constantly worry about fluctuating cash rate targets and repayments.

B. Disadvantages

1. Rate drops. Your repayments stay constant for the predetermined period even if the official cash rate decreases. Unless you refinance, you will miss out on the benefits if the rates go down.
2. Limited features. Typically, you can’t access redraw or offset accounts at a fixed rate, so you won’t be able to make extra repayments during the agreed period.
3. Refinancing fees. You may need to pay penalty fees, which can be expensive, if you choose to refinance during your fixed term.

Variable-rate loan

If you are on a variable-rate loan, the hefty hikes should concern you. Following the RBA’s 50-basis-point hike in June, it is no surprise that many banks increased their rates as well.

Last month, Australia’s big four announced that they would pass on the full value of the rate hike to customers. Westpac, ANZ, CBA, and NAB announced that new and existing customers would see a 0.50%-per-annum increase in their home loan variable interest rates.

For example, ‘On a $500,000-loan, if the rate goes from 3% to 3.5%, your repayment will go from $2109 to $2246, which is a $137-increase in your monthly repayment,’ Khalil illustrated. Worried about your repayment rates? You can easily calculate your repayments using our calculator.

A. Advantages

1. Flexible features. You can make extra repayments to reduce your loan, offset the interest costs, and redraw the money at any time. Therefore, you may save thousands of dollars in interest costs and pay off your mortgage much faster.
2. Workable refinancing. You are free to refinance or sell your home without paying a penalty fee.
3. Rate drops. Your repayments will decrease if the interest rates go down.

B. Disadvantages

1. Uncertainty. You will pay more if the official interest rates increase, so you might suffer from ‘mortgage stress.’
2. Limited budgeting. Your monthly household expenses might be unpredictable if your repayments increase as the rate also increases.
3. Confusion. You may get overwhelmed by the finance jargon involved, such as margin cap, adjustment index, etc.

Split loan

Another option that you may consider is splitting your loan into a fixed portion and a variable portion. This gives you the flexibility to take advantage of both options.

There are no rules on how much you can allocate to the fixed and variable rates. In this case, you are free to split the loan however you deem appropriate once you consider your goals.

‘Clients have the option to split their loan to have some security with current interest rate rises. For example, you can split your $1,000,000-loan into $400,000 variable rate and $600,000 fixed rate,’ said Jassem.

Since everyone’s circumstances and goals are different, it is better to speak with an expert broker to ensure that you still get competitive deals and loan options that match your needs and situation.

CONSIDER YOUR INVESTMENTS

Whether you’re new or old in investing, it is important to review your investments and the banks that best suit your needs before crafting or adjusting your portfolios.

You may consider building on your savings. In most circumstances, term deposits yield higher returns when the interest rates are high. Last month, Westpac introduced a 2.25% per annum term deposit rate for 12 months while ANZ offered a 2.25% term deposit rate for 11 months. NAB also followed along with a term deposit rate of 2.25%.

You can also talk to our brokers about growing your property portfolio. You may look into negative gearing, for instance. Negative gearing is when the cost of your investment outweighs the returns you receive. You can claim this net loss against your total taxable income, so it reduces the tax payable.

For example, you purchase a property and generate $35,000 per year in rent. The cost of owning the property is $40,000. In turn, you get a taxable loss of $5,000, which you can use to reduce your income tax payable.

Lowe ended his statement with this: ‘The Board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead. 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.’

The trajectory of the cash rate seems to be heading upwards. With this in mind, it’s important to keep a close eye on your finances and loans to make sure that you’re still making the most out of the situation.

Where do you go from here?

Get in touch with our lending specialists for free to save time and money and avoid mortgage stress. We’ll help you assess your circumstances and goals and guide you to smart decisions that will benefit you the most.

We partner with over 40 banks and lenders, so you may get more options, better rates, and cashback offers that suit your plans and needs.

If you are around Sydney, you may also be interested in our First Home Buyer Seminar on 12 July in Fairfield and on 14 July in Kogarah. Register for free, and know the ins and outs of owning your first home from our panel of expert speakers.

You can also check out our videos from our last seminar on our YouTube channel at It’s Simple Finance.

Stay tuned for our upcoming blogs about the schemes and grants that you may be qualified for to make your first dream home come to life! For a peace-of-mind finance journey, email us today at info@itssimple.com.au, or call us on 1300 796 937!