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How to protect yourself from interest rate rises

It’s been more than eleven years since the Reserve Bank of Australia (RBA) lifted interest rates. For many Australian property owners, that means it’s been a long time without any worries of how rate rises may impact their household budget.

Now that the announcement of an interest rate rise has been made – with a 25-basis-point hike taking the cash rate target to 0.35 per cent – it’s important to understand what the additional mortgage costs may mean for your household, and what steps you can take to protect yourself from the effects of further interest rate rises.

The big four banks have all been predicting that rate hikes were on their way, following recent Consumer Price Index (CPI) data that revealed a record 5.1 per cent annual inflation rate.

The inflation increase was confirmation of what many Australians already knew – that the cost of living is climbing and set to climb even more.

For more than 1 million borrowers across the country who have never experienced an official interest rate rise, the reality that mortgage repayments will chip away at whatever levels of disposable income might seem stressful. But, with some careful planning and better budgeting, there are ways you can help reduce your mortgage stress.

How will the interest rate rise impact your household?

Around one-third of Australian households have mortgages, with the remaining two-thirds split rather evenly between those in the residential rental market and households where mortgages are fully paid off.

For households who do have a home loan – and that includes landlords with investment properties – any mortgage that is not already locked into a fixed interest will feel the bite of the interest rate rise announcement. Levels of disposable income, which is defined as the income left over after taxes and living expenses are covered, will be impacted. For borrowers who have already been living on a strict budget, finding ways to trim some more spending will be more important than ever.

But the news may not be all bad, especially if you are preparing to enter the property market. For people currently saving their money with a view to entering the property market, higher interest rates may have a positive effect on households with existing cash savings, such as term deposits. In those cases, news of future interest rate rises could mean greater access to disposable income and, with an expectation that ongoing interest rate rises will see house prices in some areas fall slightly, the interest rate rise could mean happier news for first-home buyers currently saving to get into the Australian property market.

Why is the interest rate rise happening now?

The reason behind the interest rate rises is the Reserve Bank of Australia’s intention to reduce inflation.

Global factors have contributed to Australia’s rise in inflation, with ongoing supply chain disruptions caused by the pandemic and the commodity price hike caused by the recent Russian invasion of Ukraine.

When the RBA increases the interest rate (known as the cash rate target), it becomes more expensive for your lender to deliver their loan products. Lenders then typically pass on these additional costs to borrowers. That’s why, when interest rates rise, your mortgage repayments do too.

What rising interest rates could mean for borrowers

According to the RBA, years of record-low interest rates mean that some home loan customers are in a strong position to handle interest rate rises, with many people ahead on their loan repayments by as much as two years.

Level of high household debt, though, will mean that other households are not as protected. Some borrowers may be forced to make big budget changes and trim spending, in order to weather the new levels of mortgage repayments their home loan demands.

Prior to today’s RBA announcement, recent analysis by RateCity showed that a 0.15 percentage point increase in the RBA cash rate would add around $47 per month to a ‘typical’ owner-occupier mortgage of $600,000, with an additional $78 a month needed to meet the repayments on a $1 million home loan, if lenders passed on the full amount to their home loan customers.

With further interest rate rises still to come, taking a close look at your own household spending – and how you can reduce it – can help you budget better.

Practical ways to trim your household spending and reduce your mortgage

There are a number of ways to help reduce your household spending and keep a tighter rein on your budget to ensure you maximise the way your money works for you. Your accountant or financial adviser will be a positive source of tips to make a difference.

Some options could include:

Set up an offset facility to help reduce your interest payments

If you’re making minimum loan repayments at the moment, finding ways to make extra repayments can help you minimise your mortgage debt and reduce the overall interest payable.

If you don’t have one set up already, talking to your financial adviser or financial institution about whether creating an offset account will suit your circumstances may be helpful. For example, if you owe $600,000 on your mortgage and have $15,000 of salary/savings currently sitting in your offset account, you will only pay interest on $585,000.

To help clear your debts – every dollar helps

Using any spare money to reduce other loans you have is another way to reduce debt and help you focus on your home loan repayments.

Even something as simple as skipping your favourite take-away coffee order three days a week could help you find an extra $10-$15 each week – money that could be used towards reducing household debt and give you some more breathing space in your budget.

If you currently travel to and from a supermarket to get your weekly shopping done, consider trimming your petrol costs by shopping less frequently. You could also investigate how online delivery deals might also help you save on your grocery shopping and associated travel costs.

Online shopping can also be a helpful way to avoid temptation in the supermarket aisles.

Create a shopping list and stick to it. By planning your online order in advance, you can choose delivery times with reduced fees to save more.

Buying goods in bulk – if you have the space to store things – can also be a relatively easy way to trim your grocery spending. Everything from shampoo to toilet paper and passata is available in bulk sizes that can suit some families – and has the potential to trim dollars from your shopping bill.

Don’t panic – but do prepare

Having experienced low interest rates for such a long time, the thought of mortgage repayments rising with the RBA announcement may lead to some borrowers feeling a sense of panic. Preparing for the impending rise – and future rises – can help you regain a sense of control.

If you think you need support, consider reaching out to a free and confidential financial counselling service to help you create a positive budget.

When times do feel tougher, it’s natural to feel concerned.

Knowing your numbers and understanding your financial position is always important and by creating an accurate list of your incomings and outgoings, you are in a better position to make more informed decisions about what you should spend and how you might be able to make changes that help you save more.

For support with all your conveyancing needs, contact our trusted team at Conveyancing.com.au

This article is provided for general information purposes only. Its content is current at the date of publication. It is not legal advice and is not tailored to meet your individual needs. You should obtain specialist advice based on your specific circumstances before taking any action concerning the matters discussed in this article.

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