Is the low rate party over?

There’s been a fair bit of speculation around possible rate rises in the media lately. And, with interest rates at record lows, it’s a fair bet the next move will be up – especially as the economy recovers from COVID. I don’t pretend to know when that will happen,  but the Reserve Bank says it won’t raise rates until inflation is holding steady at 2-3% and wage growth is reasonably healthy. That said, there’s no room for complacency.

Home values have skyrocketed over the past 18 months. That means Australians are taking out ever-increasing mortgages.  The latest housing finance data from the Bureau of Statistics shows the average new home loan Australia-wide is now worth $574,000 – up from $348,000 a decade ago. In NSW, the average new mortgage is a massive $750,000, up from $382,000 in late 2011[1].

More worrying, first home owners – who tend to have very little home equity, are borrowing an average of $467,000 to get into the property market[2].

Faced with that sort of debt, even a small rate hike can really sting. That’s why it can pay to take action now while rates are still very low. Let’s look at some possible strategies.

Is it time to fix?

Comparison site Mozo says it’s still possible to get a 1-year fixed rate below 2%. But watch out for loan fees. These can push the comparison rate (which is the thing to look at) closer to 3%. Also, some fixed rate loans offer fewer opportunities to pay down the loan sooner.

Build a buffer

Making extra repayments now while rates are low is an easy way to get ahead with your loan, and soften the blow if rates rise. If you have an offset account, make the most of it. Have your salary paid into the account to boost the balance, which will help lower the interest component of monthly repayments.

Give your home loan an annual review

Check your home loan still offers a competitive rate. Reserve Bank figures show you could be paying an average of 3.02% on a variable rate loan – or as little as 2.38% if you switch to a new lender. With banks still offering low rate sweeteners to their newest customers there’s no real incentive to stay loyal to your lender.

Stress test your finances

If you’re having trouble managing your mortgage today, it’s important to rethink your budget. It could spare you a lot of pain if rates rise.

I stress that there’s no cause for panic. In a recent speech, Reserve Bank Governor Philip Lowe said, “The latest data and forecasts do not warrant an increase in the cash rate in 2022[3]”. But nothing’s set in stone. Taking advantage of today’s low rates can help you navigate a higher rate world – if and when that happens.

Paul Clitheroe is Chairman of InvestSMART, Chair of the Ecstra Foundation and chief commentator for Money Magazine.