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17 Mar 2022

Budgeting for interest rate rises

By Anthony Si, Senior Investment Specialist for Citi When the Reserve Bank of Australia starts to raise interest rates property buyers should already be prepared to meet increased mortgage payments

Multiple interest rate hikes are increasingly likely this year, as concerns over inflation give greater impetus for the Reserve Bank of Australia (RBA) to take action.

Financial markets already expect that the RBA will raise the target interest rate from a record low of 0.1% at present to around 1% by the end of 2022. Our view is a more orderly increase, with three rate hikes by year end leaving the official interest rate at 0.75%.

Mortgage holders need to consider ways of dealing with the increased financial pressure created by a rise in interest rates, in order to avoid problems should monetary policy change.

Use online tools to assess the precise impact of changes

As with any situation of uncertainty, it’s important to accurately assess the potential impacts of changing conditions, in order to best make plans to deal with them in advance.

We have personal loan calculator to allow you to determine loan repayments, determine your borrowing power, and compare loans. You can access them here.

In order to determine the impact of interest rate hikes, you can simply use these online tools to estimate what repayment levels will be in the case of varying increases.

You can then use this information as a sound basis for future budget planning and financial decision-making.

How will interest rate hikes affect mortgage costs?

Using online calculators, it’s easy to determine that a rise in the target interest rate may lead to significant changes in monthly mortgage repayments, and increases based on the principal of the loan.

A $400,000 30-year mortgage with a starting rate at the average new customer variable rate of 2.68% could see an increase in monthly repayments of $243, if the RBA’s target rate rises to 1.25% by August 2023.

For a $800,000 mortgage the increase in monthly payments is close to $490, while for a $1,000,000 mortgage the rise is just above $600. You can discuss how this may impact you with your mortgage broker.

Making higher repayments prepares you for rate hikes

Making repayments that are higher than your initial interest rate can be an excellent means of preparing in advance for potential rate hikes.

By making repayments at rates that are 2 to 3 percentage points higher per annum than your initial interest rate, you will become accustomed to a financial planning routine that will provide you with a safety buffer against any real rise in repayments requirements.

In addition to granting you a buffer of safety, this can also help you to reduce your loan more rapidly.

Keep an eye on other contingencies

In addition to potential interest rate hikes, it’s also important to keep in mind any other potential contingencies which could affect your ability to service your mortgage, both for better and worse. This could include shifting job and income conditions, that could lead to either more or less funds available for making loan repayments, as well as sudden health emergencies, or changes in rental conditions when it comes to investment properties.

If investors combine this with accurate knowledge of the impacts of interest rate hikes, they can ensure that they are well prepared for any sudden shifts in repayment requirements.


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Any advice is general advice only. It was prepared without taking into account your objectives, financial situation, or needs. You should also obtain and consider the relevant Product Disclosure Statement and terms and conditions before you make a decision about any financial product. Investors are advised to obtain independent legal, financial, and taxation advice prior to investing. Past performance is not an indicator of future performance.


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