The RBA recently announced that interest rates will stay at 1.5%. This is the 14th time rates have been held at this historical low. But do not get complacent. Interest rates are set to increase. It is just a matter of time. In its July minutes the RBA signalled that the “neutral nominal cash rate” would need to rise to around 3.5 per cent to keep inflation in check and growth at reasonable levels. This is a strong signal that rates will soon begin to increase.
APRA and the RBA are concerned about the current environment of high housing prices, high household debt, low wage growth and historically low interest rates. They create a perfect storm for “mortgage stress”. The RBA reported in October that ‘growth in housing debt has been outpacing the slow growth in household incomes for some time’. Since 31 March 2017, APRA has implemented many measures to curb lending, most notably that interest-only loans must be restricted to 30 per cent of new residential mortgage loans. This increased scrutiny is now seeing banks impose principle and interest repayments on new loans and assessing applications at 7.50%, not the current rates.
A ‘set and forget’ strategy is a dangerous approach for paying off your mortgage. Individuals or couples should be proactive when it comes to paying off their mortgage – the quicker the better. This is especially the case when faced with increasing rates from a historically low environment. Below are some simple steps which you can take to minimise the impact future rate rises may have on you and your mortgage. Being prepared and proactive could help reduce or prevent “mortgage stress” for your household.
1. Evaluate The Impact Of A Rate Increase On Your Repayments
Using online calculators, work out what your repayment would be if rates when up 2%. This is a beneficial exercise. It can help you to plan what your repayments would be in a higher interest rate environment and enable you to plan accordingly.
2. Shop Around For A Better Rate
Visit a mortgage broker and see if you can get a better interest rate on your mortgage. If you can get a reduction of even 0.5%, on a $500,00 mortgage that could potentially save you $43,000 over the course of a 25-year loan.
3. Pay More While Rates Are Low
Whilst rates are still low, now is the time to push what available funds you have towards your mortgage. This will help you to pay off your loan sooner, making it more manageable and it will help to minimise the impact of future rate rises. If you don’t like the idea of locking away your money, utilising an offset account can be a good compromise. It helps reduce your repayments whilst still giving you access to extra money if required.
4. Review Your Overall Debt Position
If mortgage rates increase, so will credit card and personal loan rates. If you have any other debts try to reduce these as much as possible. See our Debt Reduction Guide for strategies.
5. Review Your Personal Insurances
Just like you insure your house, income insurance protects your lifestyle. Have you ever considered what you would do if you couldn’t work? When your income is required for paying the mortgage and other household bills, it is vital that you have your personal insurances sorted.
6. Seek Advice
Having your financial affairs in order is a good idea no matter what the interest rates. Being proactive with your mortgage, superannuation, personal insurance is just smart. So don’t keep putting it off!
Contact Elliot Watson
Elliot has been working with his clients for over a decade and has spent much of that time focused on debt reduction strategies. Elliot also works closely with a mortgage broker who can assist with finding you an appropriate product to meet your financial needs and goals. Learn More
Contact Elliot Watson Certified Financial Planner for advice to consider the above strategies for yourself.
The views expressed in this publication are solely those of the author; they are not reflective or indicative of licensee’s position, and are not to be attributed to the licensee. They cannot be reproduced in any form without the express written consent of the author.
Elliot Watson Financial Planning Pty Ltd and its advisers are Authorised Representatives of RI Advice Group Pty Ltd, ABN 23 001 774 AFSL 238429.
The information (including taxation) in this article does not consider your personal circumstances and is of a general nature only – unless otherwise stated. You should not act on the information provided without first obtaining professional advice specific to your circumstances.