How to plan for an interest rate rise

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Have you heard about an interest rate rise and wondering how it will affect your property plans? 
Our guide will provide you with a forecast for interest rate rises. Knowing when to expect interest rate rises in Australia and how to prepare your budget accordingly will mean that you are better equipped to manage financially if you’re hit with rising interest rates.

Will interest rates rise in 2022?

In May 2022, the Reserve Bank raised the cash interest rate, for the first time in 11 years. Experts expect that further rate rises are likely for the rest of 2022. Also, the top four banks, Westpac, Commonwealth Bank,NAB and ANZ have all predicted that official interest rates will rise further in 2022.

Why are interest rates rising in Australia?

Economists agree that an interest rate rise is good for the economy overall, because it helps tackle rising inflation. During the pandemic, as the economy slowed down due to large parts of the country being in lockdown (shout out to those who went through it in Melbourne). So the Reserve Bank kept interest rates at record lows of 0.1%. Now the pandemic restrictions are easing and the economy is bouncing back, which has caused inflation. To cool rising prices, the Reserve Bank increases interest rates to curtail demand.

How an interest rate rise can help you enter the property market

If you are a renter looking to enter the property market, you may be actively saving for a deposit in a dedicated savings bank account. If interest rates rise, you’ll be paid more interest, allowing you to increase your deposit. Having a faster growing deposit means you’ll be ready to build a house sooner.

The other benefit for you is that interest rate rises put downward pressure on house prices. We know that housing affordability is a big issue in Australia. When interest rates rise, price pressure on properties tends to ease. This means that when interest rates go up, people can’t afford big mortgages and so have less to spend on a house. So if you are looking to buy or build a home, you may find your money going further.

How far will interest rates rise in Australia?

We aren’t precisely sure how far rates will officially rise. However most banks and economists agree that rate rises are expected of up to 2.5%. But it could be later, perhaps in the end of 2022 or even 2023.

If you are a current mortgage holder, be prepared for an interest rate rise

When interest rates rise, you will be expected to pay a larger repayment to your bank in the service of your home loan. So it’s important to be prepared to manage your budget so you can still afford repayments.

If you don’t have a mortgage yet but would like to enter the property market soon, you should still prepare for an interest rate in the same way by following the tips outlined below.

Step one: evaluate your budget

Review your spending including any current and future mortgage payments. Do you have any money left over once your mortgage payments and cost of living expenses are allocated?

Prepare prudently for potential scenarios of different interest rate rises, such as one percent extra, two percent extra and so on.

For example, if your current interest rates are 2%, calculate your repayments if rates were at 3%, 4% and 5%. Rates may not rise to these levels, but it will give you a good idea of what you can afford.

Step two: consider potential cost reductions

Are there any unnecessary expenses that you can cut that will allow you to cover additional mortgage repayments? Perhaps you can reduce your living costs that will give you more savings as a buffer. Expenses like travel, entertainment and groceries can typically be reduced.

Step three: speak to mortgage expert

Mortgage brokers can help you prepare for an interest rate rise by helping you shop around for a home loan that gives you a better deal. Brokers also negotiate with banks on your behalf.

Step four: make extra payments with an offset account

If you are only making the minimum repayments on your loan at the moment, you can start making extra payments now. This will reduce the principal amount of your loan and reduce the lifetime of the loan. Even small amounts do add up in the long run. Making extra payments with an offset account will allow you to still have access to the extra money should you need it down the track. You can deposit your salary into your offset account and use it for your daily expenses, just as you would a normal bank account. This means that the amount of interest you pay will be less, and you can still redraw funds for living expenses.

Step five: make a 90 day plan

Calculate a new budget based on your estimates. By living on this new budget for 90 days (or about three months) you’ll be in a position to know what you can afford. Focus on paying down other debts, like credit cards or store cards with high interest rates. Once those are paid off, focus on building your savings and reducing unnecessary expenses. Track your actual spending so you can make changes each month. By tracking your income and expenses you can see how closely your actual spending compares to your estimates.

If you need financial advice

In Victoria, the government’s MoneyHelp program offers free telephone financial counselling service to help people in Victoria who are experiencing financial difficulty or debt.

Ready to stop renting?

Check out our first home buyer guide for everything you need to know about buying your first home, including finances, grants, buying a land, buying a house and contract basics.

Have fun with our home design configurator and start building the home of your dreams. Or call 1800 1First (1800 134 778) or fill out our online contact form to arrange a chat with our sales team.

Disclaimer 
This advice in this article is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs. It is recommended you seek professional advice from a financial adviser before making any important decisions. 
First Place is not a financial adviser. You should consider seeking independent legal, financial or other advice to check how the website information relates to your unique circumstances.

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