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Rising Interest Rates – should you be worried?


In recent weeks/ months, talk of an interest rate hike has been at an all-time high, which isn’t particularly surprising given signs the economy is strengthening. Whilst homeowners have enjoyed record low interest rates for quite some time now, as the saying going, ‘What goes up, must come down, and then back up again.’

Have we reached that point yet?

Whilst there seems to be no shortage of economists and commentators wanting to discuss the likelihood (and timing) of an interest rate rise, we feel it’s far more beneficial to discuss what you can do now to ease the pressure of a rate rise once it actually happens.


But first, why are interest rates likely to increase soon?

It’s the RBA’s job to create and implement a monetary policy which stabilises currency in Australia, helps to support national employment levels and ensures a prosperous economy. The RBA primarily looks to achieve this by controlling inflation and preserving the value of money in our country. In recent (pandemic) years, the RBA has attempted to achieve these goals by implementing a government bond purchasing strategy, as well as maintaining a low target cash rate.

This cash rate – also known as the RBA rate – is the market interest rate on overnight loans between commercial banks. It can impact the interest rates that apply to our home loans because it’s essentially the base upon which the structure of interest rates rests upon, in our economy.

Any change to the RBA cash rate is typically seen in the market, with rate change flowing through to consumer lending products soon after the RBA announces a rate change. The RBA meets monthly to discuss monetary policy and following these meetings, the RBA Governor releases a statement to summarise the performance of the economy and provide a short-medium term outlook. These statements also advise any changes to the cash rate. The cash rate has remained constant at 0.1 per cent since November 2020.

Since the 1990’s, the RBA has set a target for consumer price inflation (CPI) index of 2-3 per cent. The ABS measured the annual CPI inflation index at 3.5 per cent in the Dec quarter, with the trimmed mean annual inflation (this excludes large price rises and falls) reported to be 2.6.

Given this index has now entered the top half of the RBA’s inflation target, we may start to see the RBA use the cash rate as the tool that it can be. Changing the cash rate is a bit like pulling a lever. Increasing it raises the cost of borrowing, which can help ease inflation back to acceptable levels according to the RBA.

Whilst inflation is one of the key measures watched closely by the RBA, there are many other economic indicators that are considered when implementing monetary policy. Given the Dec quarter was the first time the CPI exceeded the magic number of 3, it’s likely the RBA will want to ensure the CPI continues to stay/trend upwards before pulling any (cash rate) levers pre-emptively.

Something else to note here is that we’re still seeing disruptions to the supply chain due to the pandemic, which is impacting consumer prices. As the global economy starts to shift focus and ‘get back to business’ where possible, the supply issues experienced may start to ease, which could help to lower the CPI without the RBA needing to step in quickly.


How will an increase to the cash rate affect you as a borrower? And what can you do about it?

If there’s an increase to the cash rate, if you have a variable rate home loan, your interest rate (and monthly repayment) is likely to increase.

If you have a fixed rate loan, your interest rate (and monthly repayment) will not change because you have fixed/locked-in your rate (and repayment) for a specific period of time. However, that doesn’t mean you should feel smug about locking in your rate and simply go about your life as usual…

If you’re one of the many borrowers we assisted to secure in a comparatively low fixed rate last year, you may want to start thinking/planning for that point in time when your fixed rate loan comes off the fixed rate term. If you’re getting used to paying a comparatively low monthly repayment (but not building your cash reserves), you’re likely to be for a rude shock in 2/3 years time when your fixed rate loan reverts to variable, and suddenly you’re up for a higher loan repayment.

To help reduce the burden of making higher repayments when the time comes, here are a few things you can do:

1. Don’t borrow more than you can manage in the first place.

Whilst it’s tempting to borrow the absolute maximum you can, you need to remember that we’ve been in a cycle of low interest rates. Borrowing right at the top of your capacity can make it hard for you to cover loan repayments once interest rates increase.

2. Continue to save cash

We know it’s tempting to spend any residual cash you have at the end of the month, once you’ve covered your mortgage repayment. Especially if you’re still trying to make your new property feel like a home and buying a few creature comforts. However, it might not be the wisest strategy if you want to protect yourself against a future rate rise.

Having a cash buffer will provide comfort when rates rise, because you know you’ll have the funds to cover the increased repayments.

Building your cash reserves can have a double-whammy effect, if you’re keeping your cash in a linked offset. (You can read more on offset accounts here). This cash will help you to save interest on your loan, which in turn helps you pay off your loan faster. And what better way to protect yourself against a rate increase than by owing less to your lender!

3. Make additional repayments into your loan / get ahead on your repayments

Another way to add a layer of protection is to make additional repayments into your home loan. This will reduce the interest costs incurred, as well as help you pay your loan off faster. The less you owe, the less you’re impacted by a rate rise.

With a variable loan, typically you’re fine to make as many additional repayments as you like into your loan at no cost.

But with a fixed rate loan, there are typically limits as to how many additional payments you can make into your loan without incurring penalty fees. Make sure you check these limits with your lender before paying any lump sums into your fixed rate loan. Otherwise, the benefits you think you may be getting are likely to be negated by incurring penalty fees.


If you’re worried about rising interest rates or would like to have a chat about your own financial situation, please give us a call on 02 6286 6501.

Or, just provide us with your contact details here and we’ll be in touch with you soon.


***This post was published on 1 Feb 2022 ****

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