It looks like the era of record interest rates is soon over, as economists at the Commonwealth Bank predict that the Reserve Bank of Australia could raise the spot rate as early as 2022.
The spot rate has been held at 0.10% since November of last year, with the last hike in the spot rate over a decade ago. Reserve Bank of Australia (RBA) Governor Philip Lowe has suggested that we may not see an increase in the cash rate until 2024, when inflation targets could be met and term funding would end.
But that could change soon, as CBA’s Australian economic director Gareth Aird said their forecast contradicted the 2024 deadline for the past six months.
“Our message has been consistent and unwavering: the labor market will tighten quickly, which means wages and inflation will rise, especially because labor supply is limited,” Mr. Aird.
Their forecast pointed to a 15 basis point RBA rate hike in November 2022.
A sign of what could happen, the CBA raised its service floor last week from 5.10% to 5.25% – the highest rate of all the big four banks.
When a lender tests your mortgage eligibility, they make sure borrowers can afford to repay the loan at 2.5% more than their current interest rate or internal service floor, depending on the higher of the two.
RateCity’s head of research, Sally Tindall, said: “The RBA is not going to raise rates without a lot of warning. He’s used to giving us a lot of notice.
“When the time comes, the RBA will raise the cash rate with a slow and steady hand.”
But for those households that bought at the height of the market and now potentially face massive mortgage rate hikes, there is still time to prepare.
“The RBA will want to see sustained wage growth before committing to multiple rate hikes,” Ms. Tindall said.
“If not, some families could default on their loan and that’s the last thing you want. People can cushion the brunt of future rate hikes by getting their mortgage now.
“While many mortgage holders currently have a fixed rate, which usually caps additional repayments, they still contribute extra money and every dollar counts,” she said.
RateCity tips for interest rate increases
Like death and taxes, rate fluctuations are to be expected on a 25 to 30 year mortgage. Currently, there is a whole generation of new buyers who have never experienced a rate hike.
Whether the cash rate is raised in 2022 or 2024, it may be worth looking at your budget and taking stock of the following tips to protect yourself from mortgage stress.
- Consider making additional refunds. If your home loan allows you to make additional payments, and you can budget for that additional payment, it may be worth considering. Reducing your mortgage principal is an option for households to reduce their outstanding mortgage payments and overall interest charges.
- Take advantage of your counterpart account. Another option for reducing your principal and reducing interest repayments is to consider taking advantage of your netting account. Any funds you put into this account “make up” your mortgage principal, which means your repayments are reduced. For example, on a $ 500,000 mortgage with $ 30,000 in the offsetting account, the repayments will be as if you had a $ 470,000 mortgage.
- Ask your bank to lower the rates. Lenders generally reserve their more competitive interest rates for new customers to get them on the books. If you’ve been a loyal customer for a while now and have paid off some of the principal on the loan, go online and see the rates offered to new customers. You would be surprised what a lender is willing to do to make you happy if you just ask.
- Think about refinancing. If you’re still not happy with what your mortgage lender is charging you, another the option to consider is refinancing. By moving your mortgage to a lower rate lender, you will reduce your mortgage payments and the amount of interest charged. In addition, some lenders are offer refinancers competitive cashback offers to make the refinancing effort a bit easier. Just be sure to do your research on the time and cost of refinancing before committing to this financial decision.