If you’ve been following the news, you’ll probably have seen speculation about when the Reserve Bank of Australia (RBA) will increase the official cash rate (OCR).
Economists at the big four banks are now tipping an imminent rate hike, with ANZ and NAB predicting an increase this month and Westpac and NAB predicting June.
If the OCR does increase, it’s important to know how you could be affected, whether you are on the best possible mortgage and interest rate, so you can make an informed decision and potentially mitigate the impact of a rise.
Firstly, keep calm – you have buffers in place
Interest rate increases are the exact reason why lenders use serviceability buffers. Currently, for loan approval, a lender must determine that you could still make (‘service’) loan repayments at three per cent higher than their actual market rate. This means that small, gradual increases in rates should be manageable for most.
Read article: Serviceability buffers explained >
However, these buffers can’t account for all of life’s changes. If you’d like to take extra steps to put your mind at ease, here are some other options:
If it’s been a while since your last review, two things have probably happened:
• Your property value has increased.
• You’ve been lowering your total loan amount through regular repayments.
These factors combined may have reduced your loan-to-value ratio (LVR) enough to refinance to a lower-interest mortgage. This may also be a chance to include or exclude loan features that better fit your current financial situation.
If you’d like to review your loan, please get in touch with your broker, or find a local Nectar broker here.
If your expenses or spending habits have crept up since you first took out your mortgage, now could be a good time to see where you could tighten the purse strings, just a tad.
If the OCR rises, it will affect all types of lending, not just mortgages. So, if you have other debts from credit cards, vehicle and personal loans, you could consider consolidating them into one loan at a lower rate. You would save on repayments and offset some of the impacts of a rate rise.
There are pros and cons to taking out a fixed rate in any scenario. If you’d like to discuss a fixed loan, please get in touch.
• Peace of mind – your repayments don’t increase if the OCR rises.
• Better for budgeting – know exactly what your monthly repayments will be and what’s left over at the end.
• Repayments don’t decrease if the OCR falls.
• Break-fee penalties may apply for changing the loan before the term expires. These costs are usually only visible after the request to change/close the account is made and can range from nothing to thousands of dollars.
• Usually less flexibility to add features (redraw facility, extra repayments, etc) than variable loans.
Most fixed rates are for 1 to 5-year terms. Usually, if banks expect the OCR to rise, their fixed rates will be higher than their variable rates, and the trend we’re seeing right now is that the longer the term, the higher the rate.
In a nutshell, being prepared for interest rate rises is about being comfortable with your buffer. If you’re not, get in touch with a Nectar mortgage broker to discuss your options.