The Reserve Bank of Australia (RBA) has again increased its official cash rate, which is something that hasn’t happened since 2010. There’s lots of information and speculation surrounding this, so we’re here to explain in simple terms what an increase to the rate means and how you can prepare for rate rises.
What are interest rates and why do they fluctuate?
In short, the RBA dictates the cost of money to keep the country’s economy stable. The way they do this is by setting a cash rate. Increasing rates slows down the economy when inflation is too high and a decrease stimulates the economy by encouraging spending.
The cash rate has been decreasing since 2011 and the pre-rise rate of 0.1% is a record low - so it was only a matter of time before there was an increase. And because of this, interest rates are predicted to increase multiple times in the coming years.
What does this mean if you have a mortgage?
The good news is that banks, including ME, are prepared for adjustments to the RBA interest rate. As ME General Manager John Powell puts it, ‘Banks apply “stress tests”, typically around 3% p.a. above the advertised rate when assessing loan applications to ensure customers can comfortably repay in a higher rate environment.’
While that may be comforting to hear, we’re also here to help you plan for the future. So, we’ve pulled together some helpful tips on ways to prepare for rising interest rates.
1. Plan for rates to go up
The reality that interest rates can fluctuate is something to consider when applying for any loan. An excellent way to prepare for the eventuality is to look at how increases will impact your current goals and lifestyle. You can use our home loan repayments calculator to help you crunch the numbers.
2. Fixed rates may be a solid option
If you want certainty in your repayments to help with budgeting, a fixed rate loan may be a suitable option. Fixed rates are generally higher compared to variable rates at present , but over the length of the fixed period, this may change in your favour.
Consider a fixed loan that allows you to make extra repayments to reduce your loan over time. It’s also worth considering a feature called a ‘rate lock’, which guarantees the applied for rate during the application or settlement period, so you don’t miss out should rates increase in that time. ME offer a rate lock, which you can check out here.
Be aware of the end date of your fixed period, as those with fixed loans should budget for a higher rate environment at the end of their fixed loan term.
3. Make more payments now if you can
The best defence is a good offence and that applies to loans just as well as it does to basketball. Paying off your loan faster is the best way to reduce the impact of rate rises. For more peace of mind, look at loans that offer offset and redraw features so you can access additional money should you need to.
4. Minimise other sources of debt
Personal loans and credit cards have their uses, but you’ll want to ensure you’re not overstretching yourself when it comes to debt. Consider paying down any outstanding debt now. It would also be a good call to check out low rate credit cards with no annual fees to ensure you’re not paying any more than you need to. Read our handy guide for more information on consolidating your debt.
This article is prepared based on general information. It does not take into account individual financial objectives or needs and is not financial product advice.