How to best prepare yourself for increasing interest rates?
Interest rates are increasing and economists are forecasting a 1-2% increase in the Reserve Bank of Australia cash rate over the next 12 months. While the impact of increasing interest rates will be different for every household, you can take action now to prepare yourself.
Your mortgage: Understand your current mortgage and speak to your mortgage broker or bank if you don't understand it. You should be aware of how much you owe, your current interest rate, what your current repayment is, and are you taking advantage of an Offset account. An Offset account allows you to maintain access to your savings while offsetting this against your mortgage balance, and thereby reducing the amount of interest you are paying. You should be able to get this information from your banking app or online banking.
Your repayments: Calculate what your repayment will be when your interest rate increases by 0.50%, 1%, 1.5% and 2%. Ensure that this increased repayment amount can be accounted for in your household budget. If you need to adjust your budget & lifestyle to account for increasing interest rates - then it is much better to make these changes now and be prepared for the inevitable, rather than find yourself in financial stress a year from now.
I've included a table below of sample repayment changes, but use an online calculator (links below) to work out the change based on your mortgage.
Your budget: Review your household budget and identify discretionary versus non discretionary expenses. Any extra repayments you make on your mortgage now will have a compounding effect and save you money in the long run.
As interest rates rise, the more you can do now to pay extra will pay dividends in the future. With an interest rate of 4.5%:
Foregoing one coffee a day, being $25 a week, on a one million dollar mortgage - will save you 12 months off your mortgage in the long run.
If you can find an extra $50 a week (perhaps forego a coffee, a Netflix subscription and catch the train rather than the Uber), on a one million dollar mortgage - will have you paying off your mortgage 21 months earlier.
Some mortgages will allow you to make unlimited extra repayments, and on some products this money is accessible again via redraw if you need it - however - before you make extra repayments, make sure you understand what your product allows for.
Fixed rates: If you currently have a fixed interest rate, then you still be prepared for what your repayment will be when your fixed rate ends. It is important to know when your fixed rate is due to expire and what variable rate it is set to rollover to. Note: that variable rate will change if the bank is increasing variable rates while you are fixed, so it is important to estimate your future repayment based on this variable rate being 1-2% higher.
The best action you can take to prepare yourself for increasing interest rates, is to take some action. Doing nothing may lead you unprepared for what is an inevitable increase in interest rates. If you have concerns, speak to your mortgage broker or bank sooner rather than later.
External calculator link to do your own calculations: https://moneysmart.gov.au/home-loans/mortgage-calculator
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