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The RBA continues to maintain the official cash rate at 1.5 per cent since August 2016 despite out of turn rate hikes by the Big 4 banks this year. However, a recent statement by RBA Governor Philip Lowe affirms the worst fears of homeowners and prospective home buyers in the country – Interest rates are likely to go up in the future.

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What is the Cash Rate – The Cash Rate refers to the bank rate or the interest rate charged by the central bank on overnight lending to financial institutions.

Changes in the cash rate affect all aspects of the economy, especially the real estate market, as mortgage rates directly follow the cash rate. The official cash rate is a major factor, though not the only factor, that determines the interest rate charged on your home loan by your lender.

“The current market pricing implies a greater probability of a rate rise, than a rate reduction. It also implies that the next move in interest rates is a long way out,” said Dr Lowe in testimony to a parliamentary committee.

For quite some time now, experts have been predicting a rate hike, urging the borrowers to grab better deals while they are still available. The latest announcement indicates an imminent rate hike, though in another few months.


How does a rate hike affect existing home owners?

Even though the Reserve Bank kept the cash rate on hold this month, it is out in the open that a rate hike in the future is imminent. This means that the home owners in Australia could be paying hundreds of dollars more on their home loan repayments each month.

To understand the situation, take Zoe’s example. Zoe currently pays 4 percent interest on his home loan of $500,000. Taking into account a 30-year loan term, if this interest rate were to rise to 7.25%, Zoe would be paying $3,410 each month instead of $2,387 that he is currently paying, a whopping $1,023 extra each month or $12,276 extra each year.

What makes the situation worse is the low wage growth in Australia. In his statement, Dr Lowe identified low wage growth as one of the key risks to the Australian economy. Thus, thousands of indebted home owners in Australia could be under mortgage stress as a result of increased repayments and inflation that the wage increments are unable to match.


How can home owners avoid mortgage stress?

Did you know that “52,000 households in Australia risk default in the next 12 months and that 23.4 per cent of Australian families are under mortgage stress, meaning their income does not cover ongoing costs”? (read this article on domain.com.au )

A long period of low rates convinced investors and property owners to take up large mortgages that will be hard to service when the interest rates hike. Borrowers must take early action to prevent defaulting on their mortgages in the future. Considering that a rate hike is likely to follow in the coming months, here are a few tips to cushion the impact on your finances:

1. Calculate what an interest rate hike could cost you – Using an online mortgage repayment calculator, you could easily figure the impact of an interest rate hike on your monthly repayment amount. We suggest that you calculate your repayments at a rate that is at least three percent higher than your current rate.

2. Make extra repayments – Additional repayments could help you clear off your debt faster. When you make extra repayments, a larger part of the payment is applied towards the outstanding loan amount, reducing your principal amount. It could be wise to make extra repayments while the interest rates are still low to reduce your principal, and consequently, interest payments in the future.

3. Save more in your offset account – An offset account could save you thousands of dollars on your home loan. Here, the amount that you have saved in the account is offset against your home loan, and you pay interest only on the balance. For example, if you have $50,000 in your offset account and $300,000 outstanding on your home loan, you only need to pay interest on the balance, that is, $250,000. Thus, the more the money in your offset account, the lesser you pay in interest.

4. Consider fixing your home loan – Borrowers could consider fixing their home loans to manage their repayments better in the coming years. Note that, currently, variable interest rates continue to remain low, but fixed rates have been pushed up in the wake of higher interest rates predicted in the future. You could also choose to partially fix your home loan. It is recommended to get in touch with a mortgage broker to understand your options better, as the cost of refinancing should not outweigh the benefits.

5. Speak to a mortgage broker – A mortgage broker is a home loan expert who could guide you towards a home loan product suitable to your financial condition. Whether you are an existing home owner or a first time home buyer, a broker could not only help you find low interest rate deals but home loans that save you more in the long run through extras such as free repayments and redraws, offset account, etc.

 
If you are planning to purchase a home or already own one, there are cheaper home loan options currently available in the market. At HashChing, we bring you home loan deals from over 60 lenders that you can compare online. Post your home loan queries online and receive answers from expert brokers, absolutely free. Don’t worry; you will not receive any unwanted calls or emails.

 
By Vidhu Bajaj
HashChing Content Writer
 

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