For the first time since 2010, the Reserve Bank of Australia has raised the interest rate, also known as the cash rate. Announced on May 3rd, 2022, the interest rate has officially increased from a historic low rate of 0.10% to a new rate of 0.35%. It has come as something of an unwelcome shock for homeowners who are already struggling with the rising costs of basic living. Here at Melbourne Finance, we know this will affect our clients and we are here to help in any way we can. Roughly a third of all Australian homeowners currently have a mortgage. While this will rate rise will hurt borrowers more than anyone else, we also have some tips to help you stay on top of your mortgage.
Why are interest rates being raised now?
While many families are still struggling from the pandemic, the RBA and economists believe that we are now at a point where the economy is recovering. This means the financial stagnation we experienced during the past few years will start moving again into what the media is coining ‘the new normal’. From a purely fiscal perspective, a higher cash rate is forecast to help the economy get back on track and contain further inflation.
“The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected. There is also evidence that wages growth is picking up. The board judged that now was the right time to begin withdrawing some of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic,” the RBA governor Philip Lowe said in a statement. The rate rise is also being explained as being in line with the current rise in inflation. The latest figures show inflation sitting at 5.1%, with inflation hitting highs not seen for years in many countries on a global scale.
Who does it affect?
The big four banks and most other lenders have confirmed that they will be passing on the rate rise to customers. Obviously, this will affect those with mortgages who will lose a bigger chunk of their disposable income to repayments. The good news is that some households will benefit from the rate rise. Higher interest rates boost the disposable incomes of people renting or still living at home who are saving up for a house deposit, or for retirees who are mortgage-free and have significant cash savings. The majority of Australians who have significant assets are retirees, so young to middle-aged people and families with mortgages will be the worst affected. The cost of living has become an especially hot topic for the upcoming federal election.
How much more will I have to pay?
Don’t be overly worried about the rate rise until you’ve calculated your own numbers. The previous interest rate was 0.10% and has risen to 0.35%. This makes the difference 0.25%, so this is the increase that you will see in mortgage repayments. Knowing what lies ahead and budgeting for the change will help you transition to this higher rate fairly seamlessly. You can use the calculator on our home page to do your own calculations.
Here are some examples:
On a $300,000 mortgage and a $40,000 deposit, with a 30-year loan term and 2.2% interest rate, your rate will go to 2.45%. The increase in your principal and interest repayments will go from $989 to $1021.
On a $750,000 mortgage and $75,000 deposit, with a 25-year loan term and 1.9% interest rate, your rate will go to 2.15%. The increase in your principal and interest repayments will go from $2828 a month to $2911 a month.
As you can see, the increase isn’t unaffordable, but we understand that every cent counts in the current financial climate.
How can you combat the rate rise?
As financial experts, we know better than anyone that there are ways you can improve your financial situation and optimise your budget at any time. Here are some measures you can think about putting in place to neutralise the rate rise and maximise your assets.
Get back to budgeting
Start reviewing your spending and see where you might be able to cut back on non-essentials to balance out the rate rise. Forget spreadsheets. There are a number of handy spend-tracking apps that can help you determine where your spending is in excess. This way you can set spending limits so you know how much you have to enjoy life’s little extras. Budgeting is also a way to trim some of that financial fat. This could be as simple as ending subscriptions on a couple of streaming services. Also, be sure to review all of your current providers and don’t be afraid to shop around for better deals. As proud Melburnians, one thing we’d never recommend is cutting back on your barista-made coffees, but just remember that small daily or weekly sacrifices can go a long way to healthier savings.
Consider an offset account
If you haven’t set one of these up, it could offset the interest rate rise and then some, as long as you make regular contributions to it. Depending on your lender, you can use an offset account as your main account or a dedicated savings account. The more you deposit into it, the more interest you will save on your loan. As your offset grows, your payable interest will lessen. An offset that lowers interest also gives you an incentive to put more towards your savings.
Is it time for a payrise?
“It’s hard to find good people at the moment.” It’s a complaint we are hearing from businesses everywhere. The unemployment rate is low and that is a good thing, but on the other hand it also means there are staff shortages across the board. You are more valuable than ever to your employer, so this could be the right time to pitch for a better salary. Business has opened back up in a big way, so if you aren’t getting what you want or what you think you are worth, you may even be able to negotiate a higher salary somewhere else.
Last but not least, review your loan
Chat to us about reviewing your current loan arrangement. If you’ve been repaying your loan for a certain amount of time, you may be eligible for an improved rate, especially if your loan-to-value ratio has improved. It may even pay to refinance with a new lender at a more competitive rate. As Melbourne’s premier mortgage brokers, we can compare a range of loans tailored to your financial situation. To find out more, get in touch with us online or call 03 7037 9214.