THE PARTY may soon be over for Australian mortgage holders, with the minutes of the Reserve Bank’s most recent monthly meeting hinting that economic stability would be achieved at the “neutral real interest rate” of 3.5 per cent; some 2 per cent higher than the current historic low figure.
This means Australians should potentially brace themselves for eight rate hikes in the near future, according to home loan lender ME.
“It’s been an extraordinary downhill run for interest rates since late 2011, but things can easily go up as they can go down,” ME head of home loans Patrick Nolan said.
Standard variable home loan rates currently sit around 5.3 per cent on average, but this would rise to over 7 per cent should official rates get back up to 3.5 per cent.
This may not mean much to older generations as the average variable home loan rate between 1959 and now is more than 8 per cent and Baby Boomers would remember rates hitting such lofty heights as 17 per cent at the end close to 1990; but younger Australians have been in a low interest environment now for more than four years and the shift may come as a shock.
It is required of banks to ensure loan applicants could service a mortgage in the event of a rate rise, but borrowers also need to take responsibility, Mr Nolan said, offering five tips to prepare for a rate rise.
1. What goes down must come up
“Ask yourself how many rate rises would impact your money goals such as renovations and holidays. Online calculators can help you crunch the numbers.”
2. Shop around for better deals
“If your home loan isn’t charging a competitive rate now, you’ll be left even more out of pocket if rates climb higher.”
3. Consider fixing
“It’s worth thinking about locking in a fixed-rate loan. Look for a fixed loan that allows extra repayments so you can whittle down the balance sooner.”
4. Pay more now
“Making extra repayments or paying a lump sum while rates are still at record lows, helps pay off the loan sooner and minimises the impact of possible future rate rises. Loans with offset or redraw facilities also provide you the peace of mind to access that extra money, if you need.”
5 . Ditch other debt
“If interest rates head north, expect to pay more on personal loans and credit cards. If you have an outstanding credit card balance, try chiseling away at the debt today.”