How to prepare for higher interest rates

The Reserve Bank of Australia (RBA) kept the official cash rate on hold for the tenth time last Tuesday. Interest rates haven’t moved since a 25 basis point cut in August last year, however many experts agree that we could start to see them go up very soon.

Ex-RBA board member John Edwards has used a column for the Lowy Institute to discuss his interest rate forecasts for the future.

He has predicted eight rises in the next two years, bringing the official cash rate to 3.5 per cent in 2019, up from the current 1.5 per cent. This could lead to an extra $250 a month in repayments on a $300,000 mortgage.

While this may sound daunting, there are a few things borrowers can do to protect themselves against mortgage stress.

Make additional repayments

There’s no time like the present to start preparing a buffer for the future. By making additional payments on your mortgage now you will be prepared should rates go up, because you will already be paying the higher rate. Plus, you will help reduce your mortgage faster!

Look for ways to save

To avoid paying too much in the future, find ways you can cut back on expenses now. One way to do this is to shop around and compare home loans. A small saving each month could make a significant difference over the life of your loan, not to mention it will help reduce any financial impact should rates get higher.

Consider a fixed rate

If the thought of higher interest rates seriously concerns you, there is always the option to move over to a fixed, or partially fixed, home loan rate. There are plenty of good fixed home loan deals at present, however it’s important to be aware that these types of loans can have restrictions.

Overall, the more prepared you are for potential interest rate rises the better off you’ll be. If you want any further advice about your situation it’s best to talk to a financial advisor or to a bank or mortgage broker. If you want any assistance with finding the best home loan rate, get in contact with Professionals Finance.

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