The most recent session of the Reserve Bank of Australia (RBA) raised rates for cash to 3.6 percent, which marks the 10th consecutive rate increase. The current series of rate hikes has significantly increased mortgage rates, increasing monthly payments and making it more difficult to manage your finances.
Do you know the possible dangers that a rise in cash rates could pose on your loan? This article will discuss the risks involved and offer suggestions on how to plan for them.
What Are The Possible Risks?
If the RBA raises its cash rates, that implies that banks will have to pay more for borrowing money, which could directly impact homeowners. Here are a few ways that rate increases could impact your home loan.
Reduced value of property
A rate increase in cash could cause a decline in the value of property. The higher interest rates can lower borrowing capacity, making it more costly for people to take out loans. This could lead to less demand for properties and a decline in the value, which is especially relevant if you’re looking to sell your home or refinance your mortgage.
A decrease in the value of a property may pose risks to homeowners. In the first place, it may lower the equity in the home and make it more difficult to gain access to it for repairs or other expenditures. If the property’s value decreases enough, it could result in the property becoming negative in equity when the home loan balance is greater than that of the home. For instance, the most recent CoreLogic research shows that house prices in eight of ten Sydney suburbs have decreased by at least 10% from their previous highest point, which may have pushed some homeowners to negative equity. This could make it difficult to sell their home or refinance the loan.
The difficulty of refinancing
A rate increase could make it difficult to refinance your home loan, especially in a down market. Some lenders are more cautious when loaning money, which can make it difficult for borrowers to refinance.
Rate increases can add to the cost of living, making it more difficult to meet bank’s requirements for serviceability. This means more potential refinancing requests will be turned down.
The difficulties of refinancing could restrict the options available to borrowers, which makes it difficult to find a fair interest rate. It can result in borrowers being with a home loan, even though it’s not the best choice.
Being Locked Into A Fixed Rate
Homeowners who opt for the Fixed-rate mortgage might find themselves stuck with an interest rate that is higher in the event that the cash rate increases. This may make it challenging to switch to an efficient pace and may lead to higher payments.
As an example, suppose you obtained a fixed-rate home loan of $500,000 with a rate of 5 percent for a three-year duration. Two years later, the RBA lowered rates for cash, which caused variable rates to drop, which made them more appealing to borrowers. But, you’re stuck in the same rate for the second year since you are bound to the fixed rate. If you decide to benefit from the lower rates on the variable before the fixed term runs out, the break charges and other fees will be reduced.
How To Prepare For Cash Rate Hikes
Being prepared for increases in cash rates is crucial. By preparing ahead, you will avoid many of the traps. Here’s how:
Manage Your Living Expenses
Check your budget on a regular basis and ensure you’re not spending too much. Reducing unnecessary costs can help build a financial cushion that could be used to offset any rise in mortgage repayments by focusing your spending on the right areas and avoiding getting in the middle of unexpected expenses.
It would be best if you had some savings as a Backup.
Another method of preparing is to set aside money for savings. It is a good idea to create your budget with consideration for likely increases in your mortgage payments or other expenses and make sure there are enough funds put aside to cover these costs. Saving enough money to pay for your daily expenses for at least 3 to 6 months will assist you in coping with unexpected costs or meeting your mortgage payment when your income decreases.
Refinance
This is a wise option if you’re worried about rising interest rates soon. With refinancing, it is possible to get a lower interest rate, consolidate your debts res, extend the loan term to 30 years, or change to a fixed-rate loan. These changes will provide you with more assurance about the mortgage payment.
Improve Cashflow And Prepare For Higher Repayments
Improving your cash flow could be a matter of reducing the cost of discretionary expenditures, getting better terms with your creditors, or engaging in a side hustle to earn some extra cash.
Make Extra Repayments
This is when you pay over the minimal payment amount each month in order to build an excess that can then be used to pay for any future rate increases. By repaying greater amounts of the debt earlier, it will lessen the effect of rate increases and reduce interest costs by thousands throughout the loan. Certain loans will not allow extra payments. Make sure you read the conditions of your loan prior to using this method.
Build Equity
The greater the equity within your house, the greater financial flexibility you will have, and the better chance you will be able to get lower interest rates as well as better terms for loans. This can be done in various ways, such as making extra payments for your loan, boosting the worth of the home by extending or renovating it, or just holding on to your property until it increases.
Review Your Home Loan Regularly
Be sure that your home loan will continue to meet your needs and provide you with the most value for money. This could mean comparing various loan options, discussing the terms with your bank, or even refinancing to a different lender. This will help you keep track of any changes in the words of your loan or interest rates and help you identify any dangers to your mortgage payments.
Speak To A Mortgage Broker
Talking to a mortgage professional is a great opportunity to obtain professional advice on how to prepare for a rate increase. A mortgage broker can help you discover your options and come up with strategies to help you cut costs and minimize the effect of future rate hikes.
