RBA to Increase Interest Rate
A general consensus amongst economists says that they expect RBA to increase rates between 1-2% in the next 12-24 months.
With this possibility, all lenders have factored in future increases. One example is a leading lender with the following rates for an owner-occupied loan.
| Variable Rate: | 2.14% | (Full Doc, P&I 60% LVR) |
| Fixed 1 year: | 3.59% | (+1.45% above the variable rate) |
| Fixed 2 year: | 4.45% | (+2.31% above the variable rate) |
| Fixed 3 year: | 4.79% | (+2.65% above the variable rate) |
| Fixed 4 year: | 4.95% | (+2.81% above the variable rate) |
| Fixed 5 year: | 5.05% | (+2.91% above the variable rate) |
This example has factored in quite a number of rate increases within the next 1-5 years. The 3-year rate is 2.65% higher than the variable rate. Thus, the above lender has factored in 10 increases of 0.25% increases each.
Planning to fix in rates today?
Assuming that variable rates will increase, it is believed to be gradual. Although we can’t tell when or how much, we expect the RBA and banks to increase increments of 0.10%, 0.15%, 0.25% or maybe 0.50%.
If you are planning to fix in rates today, the new rate starts immediately. Yet we know the variable rate is much lower for at least the next few months.
Variable V Fixed
The examples below are based on the previous example of 2.14% variable and 4.79% fixed for 3 years:
Assuming rates increase at 0.3% every 3 months
Assuming rates increase at 0.5% every 3 months
Tips you can do during this period
- Update your budget
Review and update your budget and see how much your mortgage will increase if rates go up.
- Consider fixing in rates
Fixing in a good rate may still be worthwhile for you. Keep in mind that the fixed rate will change at the end of the fixed-rate period. There are restrictions relating to these rates that are discussed below.
- Negotiate a better rate with your lender
Contact your broker to see if you can negotiate a better rate with your lender. Refinancing to a cheaper lender may be a good option for your circumstances as well.
If you can save 0.25% or 0.50%, this will provide a buffer against a couple of rate increases. This will also benefit you at the end of a fixed-rate period (assuming you take a fixed rate)
- Increase repayments on your mortgage
Consider increasing your repayments to the same amount if rates increased to 5%. Here is an example:
| $2,108 pm | $500,000 3% P&I Loan over 30 years |
| $2,684 pm | $500,000 5% (2% increase) P&I Loan over 30 years |
Doing this will help you get accustomed to the higher instalment amount. You will also save money by paying off your loan quickly.
Fixed-Rate Restrictions
Fixed Interest Rates Home Loans have usually a 1,2,3 or 5-year set period.
Although an increase in interest rate will not affect you during the fixed-rate term, you will not benefit from a drop in interest rates if this occurs.
Unknown rates at the end of the fixed-rate term
At the end of the fixed-rate term, the loan will usually switch to the standard variable rate which may be higher than the fixed rate. Fixed-Rate Loans can make budgeting easier – knowing exactly what your repayments will be.
Limited ability to repay more
Additional loan repayments are often not allowed with fixed-rate loans or repayments may be capped at a low amount or only permitted with a fee. Any redraw or offset facility may also not be offered on a fixed-rate loan.
Potential Break Costs
Fixed-rate loans may have a break fee if you change or pay off your loan within the fixed-rate period.
Your circumstances may be different from the examples cited here. For additional information, please reach out to our team by sending an email to finance@bestinterestbrokers.com.au.