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How to effectively reduce risk against the RBA's interest rate rise

May 3, 2022

The March quarter inflation data left the RBA with little choice but to increase its interest rates, and though it came as no real surprise to anyone who follows the financial and property markets, this week's confirmation of a 0.25% rise was greater than expected.

Fortunately, the news isn't all doom and gloom for property buyers

It’s important to remember that the increase of 0.25% is nominal for the average borrower and that, typically, lenders factor in a 3% buffer when they approve a loan. Furthermore, thanks to the COVID lockdowns, many borrowers are as much as 45% ahead on their mortgage repayments, according to APRA.

However, with Philip Lowe warning of further increases over the next twelve months, some borrowers may need to exercise caution, especially in Sydney where the city’s median house price sits around $1,400,000 and there is a greater risk of them falling behind in their repayments. For example, for the average borrower with an interest-only mortgage of $620,000, a 2% rise would mean an increase of $1033 per month.

Incentives promised by the current government and the ALP during this election campaign mean there may be no better time for buyers

Despite obvious concerns, most people view this correction as a necessity. And coming as it has during an election campaign – a time when both parties are vying for votes - the rise is good news for those renters trying to save a deposit to buy - especially if property prices continue to decline as a result.

As the ABC confirmed in an article this week: “Prior to the election, homeownership for low-and-middle-income earners – without the bank of mum and dad – was little more than a pipedream, but both sides of politics are now dangling the carrot of the Great Australian Dream.”

Obviously, some young borrowers who have never experienced the high-interest rates of the nineties will be ill-prepared for such a rise. Few of them will be able to compute the mortgage stress caused by the 17.5% interest rate we experienced then. And for those buyers who have overextended themselves, the decision may leave them exposed, with limited choices: either they reduce their budget or increase their income in some way.

How to effectively reduce risk against RBA's interest rate rise
There may be no better time for property buyers

If you have overextended yourself, what can you do to minimise your risk?

Well, the obvious place to start is with a budget review. By creating a simple spreadsheet that incorporates all your outgoings, you can see exactly where your budget needs tweaking and if you are living beyond your means.

A concrete understanding of your current financial situation is imperative, but if a household budget review is beyond your personal expertise, seek professional advice from a financial advisor or use the government’s Budget Planner here.

It may surprise you how easy it is to cut your costs without too much impact on your lifestyle. But be warned: You may need to ask yourself some difficult questions as well, like whether you really need that daily coffee, take-away or Uber?

And a budget review is not the only way to minimise your financial risk. Below is our guide to several easy changes you can make to put yourself in a better position:

  1. Look at refinancing options - Find lower rates on Listing Loop’s sister site Lending Loop. Compare lenders and what they are offering. If you have the option to refinance, switch to the best deal for your financial situation.
  2. “Make sure you have buffers,” recommends RBA governor Philip Lowe. Some owners managed to save and pay off a greater chunk of their mortgage during the COVID lockdowns which may help protect them moving forward, and some will have more equity in their property because of the recent property boom. Check your financial situation with your bank.
  3. Consider a fixed-rate or split mortgage. If you are thinking about buying a property, now might be the time to make your move while you can still lock in a competitive, fixed-rate or split mortgage. But make sure you read the small print because some experts believe there is little difference in risk between variable and fixed mortgages once you consider the penalties. As the ABC points out, “It is important to remember that by taking out a fixed-rate loan you’ll need to cough up extra cash if you refinance your loan at any stage, move home or break the contract for another reason.”
  4. SAVE! SAVE! SAVE! If possible, increase your savings marginally for added financial protection and to benefit from the rate rises. Some sort of emergency fund is a good idea.
  5. Make extra repayments on your home loan IF and WHILE you still can.

There is no greater stress than mortgage stress and the pressure to keep a roof over your head, but there's usually a solution to every problem so try not to panic or make any impulsive financial decisions. Consider all your options carefully before you rush in and list your property to sell. We are living in unsettled times, and now, during an election campaign and on the back of the first interest rate rise in eleven years, may not be the optimum time to sell unless you must.

Talk to the experts

Whether it’s one of our experts at Lending Loop, your lender or mortgage advisor, or a friend or family member who has personal experience of your situation, there will be someone who can help you find a solution that works with your circumstances. But if you do decide to sell, make sure you check out our Seller Assist service, designed to make the process smoother for you.

And for those of you looking to buy a property now to take advantage of the predicted lower prices, check out our latest off-market listings at Listing Loop. Log in to your property hub now or download our app for our latest updates. Not yet a member? No problem because you can sign up with us today for free.

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