Interest Rates Are Rising, What Should I Do?
Updated: May 7
With interest rates on an upward cycle, mortgage holders are scratching their heads about what to do. Many have never experienced a rate increase before so it can all be a bit of a concern.
Firstly, don't panic. Anyone that has taken on a mortgage in the last few years would have had the lender stress test your repayments at an interest rate in excess of 5.5% to make sure you have the capacity to repay the loan. So as long as your underlying income and expenses have not changed too much then you are in pretty good shape to weather any interest rate storm.
Is it too late to fix your rate? It is never too late to fix but be aware that fixed rates have increased significantly over recent times. So you may be worse off moving to fixed rates.
As a guide, you need to look at what the difference between the fixed rate and variable rate is and then assess whether you expect the RBA to increase the cash rate by more than this difference during the fixed rate term. If you expect rates to rise much more than the difference then it may be a good idea to lock in a fixed rate. If not, or if it is very close, then it may be better to stick with the flexibility of a variable rate loan.
For example, if the current variable rate is 3.0% and the 3 year fixed rate is 4.50% then the difference is 1.5%. If you expect rates to only go up by 1.25% in the next 3 years then you would be better off sticking with a variable rate loan. If you expect rates to go up by 2.0% then you may want to consider fixing your home loan.
So how much will it rise in the near term? The RBA cash rate has been falling since 2012. During its previous period from 2009 to 2012, we saw an increase of around 2%. Economists are saying that they expect the cash rate to increase to around 2.5% by 2024 which is an increase of similar magnitude. If the cash rate hits 2.5% then this will translate to a variable (client) rate of around 4.5%.
There are a lot of things to consider and it comes down to your financial situation and how much you believe the current economic forecasts. There is no one-size-fits-all solution. You can always get the best of both and opt for a split loan structure - where you have half of your borrowings as variable and half fixed.
One thing you should be always be doing is reviewing your current home loan rate every couple of years to make sure it is competitive. A simple refinance can often get you biggest savings.