The balloon won’t go up, but what if it does? Predicting an interest rate rise is never easy, but you need to know you can afford it
When you owe half a million dollars on your own home, you want to know things are going to be okay. So what if interest rates start to make their way up?
Nine’s Finance Editor Ross Greenwood suggested this week that banks may try to edge up rates over the next 12 months. Some say there will be Reserve Bank interest rate cuts, others see pressure on the bank to raise them.
Predicting this is never easy. But out in the real world of mortgage payments, it comes down to something simpler: “If, or when, it comes, can we afford a rate rise?”
The mortgages Australians are paying today are not small – an average, in 2015, of more than $450,000 in NSW and $380,000 Victoria, according to the ABS.
If your rate lifts by two percent, the monthly cost of that won’t be trivial. On a half-million dollar mortgage, the extra monthly interest cost alone will be around $800. On a million dollar mortgage, it’ll be around $1,600 a month.
Experts say if you want to live without mortgage stress in your life, your home loan repayment should be less than 30% of your income. Recent research suggests more than half of Australia’s mortgage payers have a bigger commitment than that, and some of the big lenders are seeing a growing number of mortgage customers making minimum-only repayments on their loans.
If this talk about rising rates worries you, what options do you have? Let’s say you’re already paying nearly half your income on your mortgage at the current rates – and we know that people are – what are your options then?
No one wants to be a merchant of doom. But the more clear-eyed you are about your financial position, the more stable your position will be when bad news blows in.
Our aim here at Credit Simple is not only to provide people their credit score and credit report, we also want to help our users improve their financial position. So what can you do to protect yourself if the rates start heading upwards?
For starters, you might reconsider any plans you’d had for raising extra money for lifestyle/house extensions/spending money. Get ahead of your mortgage if you can, and then start the extensions.
If a rise in rates might mean that some months or years from now you’ll struggle to pay your mortgage, you’ll want to throttle back for now. That way you avoid any risk of a default and a negative impact on your ability to borrow later in life.
Look across your accounts – credit card debt is more expensive than a personal loan, and a personal loan is more expensive than a mortgage. It may save you money to move your debts around.
At the very least, always be looking for a better rate. You can buffer any future rate rise by getting a better one now.
And make sure you know how much interest you’re paying. UBank research reveals only 16 per cent of Australians actually know the rate they’re paying. We can promise you this: if you don’t know your rate, you probably haven’t been asking the bank if it’s the best they can do.
