Ways to save when home loan rates start going up

As the cash rate increases, lenders respond in kind, lifting interest rates on their variable rates products accordingly. To date, the majors have passed on the full rate rises to customers, that’s 1.25% in the past three months.

This has led to many news headlines screaming about rates increasing and repayments soaring. Economists love making bold predictions and the media love sharing them. Unfortunately, it creates a lot of panic for households, who are left not knowing where they stand and whether they’ll be able to afford to keep their homes and feed their kids.

How to prepare for future rate rises

• Plan for higher rates than you expect. We recommend you always calculate repayments at a high level to make sure it is still affordable for you.
• Leaving your loan variable or having it fixed becomes such an important question now. We don’t generally recommend our clients fix their rates for too long. There are so many variables that can have an impact on whether you need to make changes to your loan, redraw, refinance, pay off extra – it can be very hard to predict what you might be up to in five year’s time.
• Lots of our clients also look to split their loans, with a portion set to variable and a portion to fixed. Fixed and variable rates are going up fairly regularly at the moment, so if you are planning to fix in, we would suggest getting this sorted sooner rather than later
• It pays to plan ahead. While rates are still low, if you can afford to pump extra into your savings, redraw or offset account it’s worth doing. This will provide you with additional funds as an emergency fund or to help cover increasing costs in future.
• Be cautious of lenders putting rates up at a faster rate compared to the RBA. The RBA may increase rates gradually (or quickly) and often most lenders will simply pass on whatever the rate increase is. In some cases, lenders may increase their rates faster than the RBA does if their costs increase at a greater rate (this can be the case for some of the smaller lenders.

Ways you can get ahead with your repayments

There are a couple of options to reduce rising interest rate pressures.

• The first is to make repayments at a higher rate than the minimum. For example, calculate what the repayment will be here if rates hit 5% or maybe 7%, and increase your contribution accordingly. This ensures you are already paying the higher rate, and any extra contribution you may is going to chip away at the principle loan, reducing the amount of interest being charged.
• Another option is to park as much money as possible into the linked offset account. Every dollar sitting in offset reduces the balance interest repayments are calculated at. This means a mortgage of $1M with $200K in offset will be charged interest on $800K. Based on these figures and a rate of 5% on a 30 year term, interest charged would drop by around $348 per month or over $4K across a year.

Is now the time to fix?

Throughout 2021/22 27% of Entourage clients chose to fix all or part of their loan. As some of these loans start coming off their ultra-low fixed rates at 1.99% there’s a lot of work to be done to ensure they don’t get hit with a huge rate increase.

Alan Oster, Chief Economist of NAB, is expecting the cash rate to get to 2.60% by the end of 2023, an increase of 1.35% on the current rate (which incidentally went up this week). This means whatever the current variable rate is, add on 1.35% and that’s where we may get to. The current average variable rate (P&I, OO, 80% LVR) sits around 3.50% (with the most recent increase), which means you might be looking at around 4.75% by the end of the year depending on the lender and product.

Fixed rates went up over 1.00% last month (as much as 1.40% in some cases) across a few of the major banks. For example, CBA’s fixed rates start at 5.94% (2 year, P&I, OO, 80% LVR, 5.57% comparison rate).

Side by side we’re looking at 5.94% for a 2 year fixed vs. anywhere from 3.5% to 4.75% variable (which we may not reach this year or even next).

There are so many variables at play when looking at these options, locking in a rate can provide peace of mind in the face of rising rates. But fixing too long can mean you miss out when rates drop (think of all those people who locked in their rate in 2019 and missed out on all those incredibly low rates that we had since then).

What is the interest rate cycle?

On the first Tuesday of each month, the RBA meets where they decide whether to decrease, hold or increase the cash rate. The purpose is to keep inflation under control. Dropping the cash rate mean the economy needs an invigoration, holding the cash rate means we are looking good, and increasing the rate means we are in an inflationary environment.

Within 24-48 hours most lenders will decide whether to pass the rate increase on. The banks borrow funds to lend to consumers, and the interest they are charged on their loans is reflected by changes to the cash rate. By increasing home loan interest rates, they are simply passing on this increased cost to the borrower.

Learn more about refinancing here to ensure your always getting the best deal on your home loan.