5 ways to prepare for a rate hike

Interest rates may have been favorable to borrowers in recent years, but ME Bank chief executive John Powell has issued a fair warning that “things can easily go up as they can go down”.

According to ME Chief Economist Peter Munckton, financial markets are already forecasting the first RBA cash rate hike to take effect by mid-2022, with a full percentage point rate hike by early 2023.

“The current consensus among economists – and my view – is that the first rate hike will occur between the fourth quarter of this year and the middle of next year, and possibly sooner. It depends on the domestic inflation and wage outcomes, as well as what happens to global interest rates, particularly in the United States,” Munckton said.

In theory, a 1% increase in the cash rate, if passed on to borrowers, would bring the average homeowner’s variable rate mortgage to nearly 4%, adding about $270 a month to a $500,000 loan. $.

Although banks use ‘stress tests’ when evaluating loan applications looking at higher-than-listed rates to see if consumers “can comfortably repay in higher-rate environments,” Powell pointed out that “responsible borrowing is as important as responsible lending”.

And with the likelihood of rates rising, borrowers would be well advised to prepare for increased spending in the months and years to come.

Here are five ways to prepare for a rate hike:

1. Keep in mind that refunds can go up or down

Consider the impact of a rate increase on your financial goals and other lifestyle decisions, such as renovations and vacations. You can use online calculators to work out the numbers and easily plan different scenarios.

2. Make sure your home loan is affordable

Being stuck with a home loan rate that isn’t competitive is like watching your money fly away. You’ll be worse off if rates rise further. Take the time to compare rates because, despite the fact that some fixed rates have already increased, several banks are still lowering variable rates.

3. Consider switching to a fixed rate loan

After doing your due diligence and evaluating different scenarios should rates increase, consider locking in a fixed rate loan, especially if even a moderate increase will affect your budget.

Some banks still offer fixed rates at historically low levels. These are two features to look for in a fixed loan:

  • a fixed loan with additional repayment options so you can pay off your debt faster, and
  • a “rate lock”, which allows borrowers to lock in a low rate during the application or settlement period, ensuring that you don’t miss it.

Just be aware that when you go for a fixed loan in a high rate environment, there is a greater chance that the rate will increase at the end of the fixed loan term.

4. Try to increase your extra refunds where possible

Having a smaller loan balance is the best action against rising rates. Take advantage of low interest rates by making additional repayments or advancing a lump sum. This can help pay off the loan faster and reduce the impact of future rate hikes.

Additionally, ME experts said that “loans with offsetting or recalculation features” also give you confidence that you will be able to get that extra money if you need it.

5. Reduce your other debts

Paying off interest on personal loans and credit cards could bury you in a mountain of debt when interest rates rise. Avoid this awkward situation by paying your credit card bill regularly and shopping around for low-rate cards, preferably with no annual fee.

RELATED TERMS

Mortgage

Mortgages are loans that are used to purchase homes and other real estate where the property itself serves as collateral for the loan.

Mortgage

Mortgages are loans that are used to purchase homes and other real estate where the property itself serves as collateral for the loan.

5 ways to prepare for a rate hike



spinnaker logo


Last update: February 01, 2022

Posted: February 02, 2022