The Reserve Bank of Australia (RBA) have decided to raise interest rates for the first time in 11 years. This means that for those that have a variable home loan, the rise in rates will have a direct impact on your repayments as all lenders pass on this cash rate hike to borrowers. Traditionally, lenders will take no longer than a week to pass on this increase to their borrowers.
Is a rate rise to your home loan avoidable?
In short, there is no way to avoid a rate rise nor any future rate rises. One option you do have is to fix a portion of your loan. Currently, the interest rate on Fixed loans is higher than variable rates due to banks pricing into the Fixed rate what they predict will happen over the next few years. Fixing a portion of your loan now will provide protection in the event of future rate rises, however doing so will be at a higher rate and therefore increase your monthly repayments. The main benefit of fixing your loan is that doing so will provide a sense of surety and consistency in repayments over the fixed term.
What happens if my home loan is Fixed?
If your loan is Fixed, the rate rise by the RBA will not change your repayments on your fixed loan. We are not recommending any of our clients to break their fixed loan at this time. Rather, we recommend waiting until 1 month before it expires before analysing other options.
Should I refinance to a new Lender?
Different Lenders will pass on rate rises at slightly different times and in different increments so might look like a better rate at one lender today may not be true in time.
Are more rate rises coming?
Yes, there certainly will be more rate rises in the next 18 months. CBA Chief Economist Garth Aird expects the cash rate to rise by 1.15% by the first quarter of 2023 and AMP Chief Economist Shane Oliver is anticipating an increase of 1.4% by the end of 2023. We can also see what the banks are predicting to happen given the average fixed rates for 2 and 3 Year Terms are around 3.5% and 4%+ respectively.
Do rate rises impact my Pre-Approval?
As rates rise, your borrowing power (ability of your income to repay debt) reduces. This means that any pre-approval you have in place will need to be reviewed to ensure the loan amount you are pre-approved for is still achievable. With this in mind, we strongly recommend all clients reach out to us before making any offer or bidding on a property to ensure we review your financial position in line with the current lending conditions.
With great movement in the lending space, now is a good time to get in touch with 40 Forty Finance to explore your option on new and existing finance.