The Reserve Bank of Australia (RBA) has held our interest rates at an all time low for some time now. This is good news for first home buyers entering the market but a word of warning.
How would you feel if your repayments increased by nearly $3000.00 per month. Scary but if the rates increased to the level of 17% like they were in the 1990’s then on a typical $350,000.00 loan this would be how much extra you would need to pay.
Paying this extra amount would be an impossible ask for almost every household, which is why the likelihood of rates rising that high ever again is also impossible. The return to the 1990 interest rates would destroy almost every household’s finances.
The RBA uses its official interest rate (also known as the cash rate) as a tool to try to control inflation and economic activity. The theory is that lowering the cash rate increases consumer and business spending and fuels the economy, while raising the cash rate slows things down.
Since the 2008-09 Global Financial Crisis the RBA has mainly been lowering the official rate because consumers and businesses have been afraid to spend. The cash rate currently sits at a record low 1.5 per cent and inflation remains rather weak.
Lenders have been raising their rates even though the cash rate has remained the same and this has the same effect as an official interest rate rise — borrowers pay more. It is looking unlikely that there will be any rises to the RBA’s official interest rate in the next six or 12 months and there is also talk that there maybe a chance of another cut this year.
There is really no need to worry about any huge rate rises as this would be likely affect most households hard enough to hurt the economy and probably quickly lead to more RBA rate cuts.
DO YOUR HOMEWORK
Always talk to you mortgage broker or bank first to ensure that if the rates go up again that you can afford to pay these higher rates. If your budget can handle rate rises of 1-2 per cent the you should be fine for at least the next few years.
It is quite common to hear as soon as interest rates rise that home owners are unable to service the higher amounts and then need to sell urgently and you do not want to be one of these statistics.
Doing your homework and calculating payments on higher interest rates would be a wise thing to do so YOU don’t get caught out. If the RBA reduce the rates again this year this would be a windfall for anyone who owns their own home. If this happens it is also a good idea to pay the same amount off your loan which will reduce the term of the loan quite dramatically and also be a saving towards any future increases.
Talk to your Conveyancer or Mortgage broker BEFORE you sign the contract to ensure you are fully aware of all the consequences of changes in the RBA rates.