5 ways to prepare for home loan rate hikes

Adam Smith 5 December 2016 NEWS

prepare for rate hikesRate hikes are coming, but you can act now to insulate yourself.

As recently as August, commentators were predicting that the Reserve Bank would continue cutting the official cash rate. When the board trimmed the cash rate to 1.50% at its August meeting, many pundits forecast another cut for November. There was even talk that the cash rate could fall below the 1% mark.

How quickly times change. Markets are now banking on the Reserve Bank’s next move being upward. Lenders seem to also be anticipating the end of the RBA’s easing cycle. Both fixed and variable rates have already begun to rise, and seem likely to rise further following the Reserve’s final 2016 board meeting on Tuesday.

ANALYSIS: Which lenders have moved rates in December already?

While all 35 experts surveyed by finder.com.au’s monthly RBA survey predict the Reserve Bank to leave the cash rate on hold at its December meeting, 30% believe the RBA will begin hiking rates next year. A further 37% think the RBA will lift rates in 2018 and beyond.

With rock bottom rates set to become a thing of the past, homeowners may find themselves facing heftier mortgage payments. But there are steps you can take now to help alleviate the shock should your bank begin to hike rates ahead of the RBA.

1. Start building a buffer

Instead of making the minimum payment on your home loan, start adding a little extra to your repayments. You’ll be surprised how quickly this can add up, as evidenced by the calculator below.

Another strategy you can use is to make split your monthly repayment amount in half and pay it fortnightly rather than monthly. Paying fortnightly means you’ll end up making an additional repayment each year, as you can see below.

Monthly repayment: $3,000
Paid monthly: $3,000 x 12 = $36,000 per year
Paid fortnightly: $3,000/2 = $1,500. $1,500 x 26 = $39,000

This strategy will effectively put you a month ahead on your home loan repayments, which will give you a bit of a buffer should rates rise.

You can also work in your own interest rate buffer. Figure out your home loan repayment should variable rates rise, for example, by 2%. You can use the calculator below to figure out what your regular repayment would be.

This strategy also helps you build up a buffer of extra repayments, and it also has the benefit of getting you used to making higher repayments before your lender raises rates.

2. Try to negotiate a better rate

Many borrowers don’t realise that they may be able to negotiate a better rate with their current lender just by asking. If you call your current lender and tell them you’re considering refinancing, they may be able to offer you a discount on your current interest rate.

If your lender is willing to trim a few basis points off your current rate, future rate rises won’t hit you quite as hard. Should your lender hike its rate by 0.25%, getting yourself a 0.10% discount now means you’ll effectively get hit with only a 15 basis point hike in the future.

3. Work out a budget

Budgeting for future rate hikes now means you’ll be prepared when they become a reality. Again, using our repayments calculator you can see what your home loan repayment would be should rates rise. Even if you don’t proactively begin paying this higher amount, you can work out a budget to ensure you’ll be able to when it happens.

4. Consider fixing now

Fixing your entire home loan can always be a bit of a risky strategy. You’re wagering on the idea that variable rates are likely to rise rather than fall. While fixing means you’ll be insulated from rate hikes, it also means you won’t benefit from rate reductions. With this in mind, if you choose to fix your home loan rate you should do so to lock in a repayment you’re comfortable with.

Fixed rates are already beginning to rise, so time is of the essence in employing this strategy. In the past few weeks, lenders have hiked fixed rates by up to 60 basis points. Good deals on fixed rates still exist, though. If you lock in a rate now at a repayment level you know you can manage, you’ll have the peace of mind that you won’t face mortgage stress in the future.

5. Tackle other debts

You can free up some extra cash for the potential of higher home loan rates in the future if you focus on paying off other debts in the present. If you have a personal loan or credit card debt, devote yourself to attacking the debt now. This is a particularly important strategy if you have a variable rate personal loan.

If you focus on paying off debts that attract a higher interest rate, you’ll free up money that you can devote to home loan repayments. Should home loan rates begin to rise, the extra surplus cash you’ve freed up means you won’t be caught flat-footed.

More lenders change fixed rates

Lender Change Loans affected
Qudos Bank Up 0.45 - 0.60% Fixed Rate Investment Home Loan
CUA Down 0.15 - 0.17% 1 and 2 Year Fixed Rate Home Loan (owner occupier, investor, premium and standard fixed)
Newcastle Permanent Building Society Up 0.20 - 0.60% Fixed Rate Home Loan (owner occupier and investor)
Greater Bank Down 0.10% Great Rate 3 Years Fixed Rate Home Loan (owner occupier + investor), Ultimate 3 Years Fixed Rate Home Loan (owner occupier + investor)
G&C Mutual Bank Up 0.15 - 0.25% 4 and 5 Years Fixed Rate Home Loan (owner occupier + investor)
Victoria Teachers Mutual Bank Down 0.25% Standard Fixed Rate Home Loan (investor), Complete Fixed Rate Home Loan (investor) + Education Package Fixed Rate Home Loan (investor)
Police Credit Union Up 0.25% 3 Years Fixed Rate Home Loan
Macquarie Bank Up 0.15 - 0.50% Basic Flyer Fixed Rate Home Loan (owner occupier + investor), Basic Fixed Rate Home Loan (owner occupier + investor)
Commonwealth Bank Up 0.15 - 0.65% Fixed Rate Home Loan (owner occupier + investor), Fixed Rate Wealth Package Home Loan (investor)
Greater Bank Down 0.10% Great Rate 3 Years Fixed Rate Home Loan (owner occupier, investor + discounted offer), Ultimate 3 Years Fixed Rate Home Loan (owner occupier, investor + discounted offer)
Newcastle Permanent Building Society Up 0.20 - 0.44% Fixed Rate Home Loan (owner occupier + investor)
Homeloans.com.au Up 0.20 - 0.50% Optima Fixed Rate Home Loan (owner occupier, investor, principal and interest + interest only)

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