Tips for preparing for a change in interest rates
Why do interest rates change?
To understand why interest rates change, we'll first talk about the cash rate. The cash rate is a rate set by the Reserve Bank of Australia (RBA) representing the interest that banks and lenders have to pay on the money that they borrow. This rate will rise to try and slow the economy down, or fall to promote economic growth.
The RBA's objective is to promote a stable currency, full employment and economic prosperity, ensuring that price growth, or inflation, remains relatively low and stable.
Interest rates on the other hand, are what determines the cost of borrowing or lending money. If the RBA raises the cash rate, then it will cost more for banks to conduct business between themselves. Banks and lenders may pass these costs on to consumers in the form of rate rises, meaning anyone who has borrowed money from that institution will be charged more interest.
What does an interest rate rise mean?
The cash rate has a flow on effect to financial products with variable interest rates, such as savings accounts, variable rate mortgages and personal loans. Learn more about the different types of loans. It also impacts cost of funding for the banks. An interest rate rise means the cost of funding a loan has increased. This can lead to higher repayments, which can leave borrowers with less disposable income, meaning many people may need to look to make savings elsewhere.
Interest rate rises can be tough for families and small businesses, as increased mortgage and debt repayments can make life more expensive. On the flip side, depositors enjoy an interest rate rise as they will see a greater return on their savings and term deposits.
What is the impact of interest rates rise on mortgages?
A rise in interest rates will see your minimum monthly repayment increase. If you’re not sure what this is, you can find out by checking the loan details in your online banking or by asking your lender. If you're on a standard variable rate loan, you'll probably see your rate go up in line with any interest rates rise.
It is important to check your loan contract and any other relevant terms and conditions when you first receive your loan offer.
Fixed-rate mortgage holders are likely to be affected when they reach the end of the current deal. A rise in interest rates could make a re-mortgage more expensive.
It’s important to remember whilst a small rise may not affect your repayments too much, a few consecutive rises could have a significant impact on repayment costs.
How do I prepare for an interest rate hike?
It’s important to have a financial plan to deal with any potential changes in interest rates. If you’re following the market and have noticed interest rates rising, you can always speak to us about your home loan to see if making extra repayments or switching from variable to a fixed rate would be in your best interest. If you don’t have a home loan with us, get in touch to see if refinancing to Horizon makes good financial sense.
Making a plan to cover the next three to six months is a good idea to make your money go even further. Setting a budget and reducing unnecessary spending is a great place to start. Putting extra money towards other debts like credit cards and personal loans will also put you ahead if interest rates rise.
Tips for managing an interest rate rise on your mortgage
Calculate the impact the interest rate rise will have on your mortgage. Use our loan repayment calculator to get an idea of how calculator to work out the impact.
Calculate what you can afford
If your mortgage repayments are likely to go up, work out if you're able to afford them. As discussed earlier, you may need to cut un-necessary spending to make up this extra cost.
If you think increases are expected to happen in the future, then start saving up enough money now to cover your mortgage payments when they occur.
Are you on the best deal?
If you have a fixed rate home loan with us, we will be in touch before your fixed term ends to discuss your options. At this point you can lock in a new rate or switch to a competitive variable rate.
It’s important to speak to your financial institution first to see if the savings are worth it before switching.
Make more mortgage repayments if you can
Taking advantage of the lower interest rate environment while you can and paying extra if possible will put you in a better position during a rate hike.
It’s important you always check with your mortgage provider before you pay any extra repayments as fees may apply, especially on a fixed rate loan.
What happens when interest rates fall?
Low interest rate environments tend to benefit borrowers rather than savers.
The goal is to stimulate economic growth by making it cheaper to borrow money for large purchases like property. People are willing to make larger purchases and will borrow more, which increases the demand for household goods.
A low interest rate environment is great news for homeowners because it will reduce their monthly mortgage payment. This also sees potential homeowners be drawn into the market because of the cheaper costs. The flow on effect is that low interest rates mean more spending money in consumers' pockets. Lower interest rates gives borrowers a break in terms of lower debt repayments and it can also provide an opportunity to get ahead on your mortgage.
Unfortunately, people with large deposits in the bank don’t see much of a return on their investment when interest rates fall.
To view our current interest rates on our loans and savings products, visit our interest rate page.
Horizon Bank is here to help you with your banking needs. If you have any questions or would like us to discuss your needs further please get in touch with our friendly local team today.
The content in this article has been prepared by Horizon Bank for general information only and it is not intended to be professional advice. It does not take into account your objectives, financial situation or needs. You should seek your own legal, accounting, financial or other professional advice where appropriate, and consider the relevant Product Disclosure Statement and Terms and Conditions before deciding whether to acquire any products or services offered by Horizon Bank and/or its affiliated partners. We do not recommend any third party products or services referred to in this article unless otherwise stated and we are not liable in relation to them. Any links to third party websites are for your information and we do not endorse any content on those sites. Horizon Credit Union Ltd ABN 66 087 650 173 AFSL and Australian Credit Licence Number 240573 trading as Horizon Bank.