Home lenders may soon face the grim reality of rising interest rates in 2022, as it is anticipated the Reserve Bank of Australia will have to make a dreaded move to a rate rise sooner rather than later. The RBA had scheduled rate hikes towards the end of 2023, however with a sharp rise in inflation in the December 2021 figures, economists are predicting the Reserve Bank of Australia will be forced to lift interest rates as early as May.
Rising house prices, rocketing fuel costs, and costs of goods have contributed to the spike in inflation. The Australia’s Consumer Price Index rose by 1.3% in the three months to December, bringing inflation for the full 2021 year to 3.5%, which is above the RBA’s medium-term target range of 2-3% inflation.
Like many Australians, if you are a proud owner of a home mortgage, here are five smart strategies to optimize current low interest rates and pay down debt sooner.
Monitor your affordability
Leading mortgage broker eChoice1 suggests that as a rule, home loan commitments should represent no more than 28 per cent of household income. Anything above that amount, the average earner might find their financial situation stretched. In the current environment, the average monthly home loan repayment of $2,489 sits on the high side at 36 per cent of the average household income, with any increase in interest rates only or rising cost of living putting a homeowner at risk of falling prey to mortgage stress. Monitor your affordability by utilizing the mortgage calculators on https://moneysmart.gov.au/.
Make extra repayments
Take advantage of the current low interest environment and get ahead on your mortgage by making repayments as if you had a loan with a higher rate of interest. A general rule is to factor in an interest rate of 5 percent.
The Governor of the Reserve Bank2, Philip Lowe, had announced that the RBA aims to maintain its current low interest rates until 2024. With a looming threat of an earlier interest rate hike, use this time to curb your debt levels with any extra money directed to pay off your mortgage sooner, hence protecting the household budget from higher interest rate shocks.
In addition, consider switching a monthly repayment commitment to fortnightly. By paying half the monthly amount every two weeks you’ll make the equivalent of an extra month’s repayment each year (as each year has 26 fortnights).
Build up a cash reserve
Building up a cash reserve within an offset account could see you reduce the amount of interest you pay and help with paying off your mortgage faster. Whether the cash funds come from a windfall, savings or annual bonus, it pays to store it as a buffer for future rate hikes.
Shop around
With interest rates on the rise, it pays to shop around. Useful websites such as www.canstar.com.au or www.finder.com.au provide comparisons against your existing home loan rate. Special rates as low as 1.79 per cent have been advertised. Work out what features of a home loan suit you, and tailor a mix of fixed and variable portions of your mortgage to give you certainty on your repayment commitments over the short to medium term. Before switching loans, consider the exit costs. It may be worthwhile negotiating a competitive interest rate with your existing bank first or switching to a principal and interest loan.
Seek advice
When in doubt, seek the advice of a mortgage broker or financial planner. The insight and guidance of a subject matter expert can go a long way to giving you comfort and assistance in achieving a better financial outcome as well as putting your mind at rest about the future.
1 Source: https://www.echoice.com.au/guides/whats-the-average-australian-home-loan-size/
2 Source: https://www.rba.gov.au/media-releases/2021/mr-21-22.html