Welcome to our special update for May 2022 on the RBA interest rate rise.
As it’s the first rate rise in 12 years, I wanted to make sure you all felt informed and comfortable with your home loan.
This is an edited version of the regular YouTube update which you can watch below.
Today I will cover:
- How rate rises may affect me
- Will fixing my home loan make it more affordable?
- Advice to navigate through these times
If you want to discuss your personal situation, please book a call with me here.
Topic 1: How rate rises may affect me
So the Reserve Bank of Australia has recently increased interest rates for the first time in nearly 12 years.
They went up from a very low level of 0.1% and increased by 0.25% to 0.35%.
Nearly every bank passed on the 0.25% increase to their clients.
What that means to the average person is if you are on a variable home loan and paying principal and interest.
Then for each $100,000 that you have borrowed, you’ll now be paying an extra $4.80 per week in interest costs and repayments.
Why have rates risen?
The history of it is that the 0.1% that the reserve bank had set previously was artificially low.
It was this low because they were trying to nurse the economy through Covid-19 and all the things happening around the world at that time.
At the moment the reserve bank and the government are afraid that inflation is starting to rise and this is not just in Australia.
If you look at overseas news inflation is happening and a concern around the world.
Psychologically and financially this could have significant impacts on the economy.
So the reserve bank is increasing interest rates in an attempt to slow down inflation and bring prices back to a more stable level.
At the moment there are some really wild predictions out there of interest rates going to very very high levels.
Some people have talked about a 17% hike like in the early 90s and that kind of stuff because the reserve bank hasn’t done anything for 12 years in terms of raising interest rates.
It seems to me that they would take a more measured approach and they might increase interest rates once, twice or three times and then consider the situation rather than going hell for leather and raising rates 10 times in a row.
But it does seem that there are more interest rate rises to come, and it will be interesting to see how that plays out over the next few months.
Topic 2: Will fixing my home loan make it more affordable?
So the answer, of course, to this is it depends.
The first question is, is if you’re asking me can I beat the bank by fixing?
So a lot of people when they ask me this question are actually asking…
…look, am I going to make money or pay less interest by fixing my loan at the moment over going variable?
They are going …here’s fixed and this is what I’m going to pay.
And here’s the variable and if I fix am I going to pay less.
The challenge with that is that both of those outcomes have a bank on the other side.
So when you fix your loan with Commonwealth Bank, ANZ, etc, they are the banks that are setting those interest rates for you to fix.
And those banks are some of the biggest and most successful companies in Australia and a lot of banks are some of the biggest companies in the world.
They don’t get to be that big and successful and make all the money that they do by letting a mortgage broker somewhere go, yeah yeah fix and you’ll beat them.
It just doesn’t work that way.
What to consider if you do want to fix your home loan
So what we suggest to do is there are a couple of rules around fixing.
- If you do fix it – you should keep a chunk on a variable loan.
- And that is because you have some flexibility there to pay that loan off and make extra payments into it.
- You also might have an option where you can have either a redraw or an offset account against that loan, which will reduce how much interest you pay.
- If you pay extra into a loan and then in the future when you need that money with a variable loan, you can draw that money back out so it can help with your budget.
Whereas if you have a fixed rate loan and you’re paying extra money into it, it’s nearly impossible to get that money back out again without breaking the loan and also things like the offset account and redraw don’t work.
Is fixing the right decision for me?
So that brings me back to why you should fix and that is a personal question and it’s usually based on your individual family situation.
So rather than going when we answer that question, rather than thinking oh am I going to beat Commonwealth Bank at this?
The question to ask is more over the next 2 to 5 years.
In this time if I do fix my loan does that give me a good level of certainty for my home and for me personally so that I feel comfortable for that period of time that I can comfortably make repayments?
For example, you might have bought an investment property so all of a sudden you’ve gone from having just a home loan to now having a home loan plus an investment loan.
And you might go look I’m a bit concerned about all the debt that I have got.
You might go, if interest rates rise how am I going to pay for it all?
And you might go, okay if I fix a portion of this that’s going to give me certainty over that part of the debt so I can handle if the other one changes.
Will fixing my rate help me beat the bank?
At the moment if you look at the fixed rates, the fixed rates are significantly higher than the variable rates so as soon as you fix you are paying a chunk higher.
And in some situations, that’s nearly 2% or higher than what the variable rate is.
So what that means is if you’re paying for example 2.5% at variable rates but you fix it at 4.5%, then straight away you are paying the equivalent of 2% percent higher.
Now 2% is eight lots of a quarter of a percent interest rate rise – so you are paying it straight away.
In effect for you to beat the bank, so to speak, the interest rates have got to increase very quickly and they’ve got to increase more than 2% for you to be better off fixing.
If they only go up by 1% for example or even 1.25% and then the reserve bank decides you know what we don’t have to raise as much anymore or it slows down inflation then all of a sudden you’ll be stuck at a higher interest rate paying a higher repayment than the variable would have moved up to.
It will be very interesting to see what happens but if you want to talk about this more individually please reach out and let us know.
Topic 3: Advice to navigate through these times.
The first thing is not to panic, in spite of all the stuff that’s been written about it and the very strong words about it, is not going to change the situation.
Panicking rarely helps for anything to ever get done.
What we can do now is look at what we can do to get prepared.
So what that, it is finding areas where you can cut your costs.
On say, a $500,000 loan, your repayments are going to go up by approximately $25 a week.
Most people will have something that they spend money on that they can either reduce the spending of that money or they can make extra saving in order to do something to cover that.
This is a good period to reduce or review your finances and your budget and to see where you’re spending money.
Sometimes it can be cutting down on subscriptions that you might have for Netflix or Disney+ etc.
Maybe you have them for a few months then stop them and instead of having two or three at once, have them in blocks. We have them for two or three months and then cancel them.
A lot of things these days are on subscription. Companies love billing you every month for something and a lot of people don’t even use it very much but are still paying the direct debit. So maybe canceling a few of those will help reduce expenses.
If it is something that you are really concerned about yourself, your family situation and you want help and to have a talk about the situation to see what steps you can take.
As always you can book a phone call, and I’m happy to talk you through what’s happening and what you can do.
Be prepared for the fact that there probably are going to be a few more rate rises, whether they come in as quickly as everyone is saying or whether it will take some time will be interesting to see.
But we’re always here to talk about it if we can help with it.
My name is Victor Kalinowski and I’m a mortgage broker at Blackk Finance, with offices based in West End in Brisbane and Burleigh Heads on the Gold Coast. I help clients from all over Australia buy homes. If you’re interested in getting in touch for some advice, book a call instantly at a suitable time or call us on 07 3122 3628 today.
The information contained within this page is general in nature. It serves as a guide only and does not take into account your personal financial needs. Before you act on this information you should seek independent legal and financial advice. Copyright Blackk Finance 2022.