Interest Rates Are Rising, So How Can You Manage Your Mortgage?
Are you worried about rising interest rates? Well, it's no surprise that mortgage holders are feeling the pinch after the Reserve Bank of Australia hiked interest rates for the second time in two months.
In Australia, the cost of living has jumped significantly in recent months. So, what has caused this spike?
Inflation is driven by a range of factors, including the conflict in Ukraine, and the ongoing pandemic that is leading to a crunch in global supply chains.
Domestic factors are also playing a crucial role, with some sectors struggling with capacity constraints, and the labour market contributing to pressure on prices. Floods on Australia's east coast have also driven up the price of groceries.
Dr Philip Lowe is the Reserve Bank’s Governor who said inflation is expected to increase before a decline back towards 3 per cent next year.
Higher prices for electricity and gas and recent increases in petrol prices mean that, in the near term, inflation is likely to be higher than was expected a month ago.
"As the global supply-side problems are resolved and commodity prices stabilise, even if at a high level, inflation is expected to moderate", he said.
The cash rate was also recently lifted from 0.35 per cent to 0.85 per cent. This is an important figure, because it determines the amount of interest that banks pay on their overnight borrowing, which is ultimately passed down to you.
Despite these figures, analysts are confident in the Australian economy.
How Can I Cope With Rising Rates?
What can borrowers do to ease the pressures as interest rates continue to climb?
Refinancing to a lower interest rate is a relatively simple process. For example, you may wish to put down a 15 to 20 per cent deposit on an $800,000 loan and make repayments over a 25 year period at a lower rate of 2 per cent.
Importantly, you should consider any ongoing fees to ensure that your loan is future-proofed.
You may also wish to consider fortnightly payments, which can save you significant money. For example, on an $800,000 loan at an interest rate of 5 per cent, you will save you over $200,000 in interest repayments over a 30 year period.
An offset account, or a flexible mortgage, shifts the balance of your account against the balance of your home loan. This means that you only pay interest on the difference. Even better, you won't attract any taxes.
Above all, you may wish to renegotiate your rate. Times are tough, and your bank should be a helping hand to ensure that you are on the lowest rate possible.
"The size and timing of future interest rate increases will be guided by the incoming data and the Board's assessment of the outlook for inflation and the labour market", Dr Lowe said.
Australia's economy has grown by 3.3 per cent over the year, which places the nation in a decent position to bounce back, and ensures people remain in their jobs.
Compare & Connect offers an interactive tool that helps you to future-proof your finances.