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June 2017

“what’s going to happen to rates?”

Unfortunately, the economic future doesn’t appear as I stare down into my mug of Lipton this afternoon. However, it doesn’t take tea leaves to predict that we’re at the bottom of the current interest rate cycle, and rates only have one way to go.

Are the RBA going to raise rates?

Although the official cash rate is unlikely to increase in the immediate future, Reserve Bank Governor, Philip Lowe, has given many signals, including a recent remark that encouraging more borrowing "is unlikely to be in the public interest", which shows he's not planning to make any further cuts either. However, lenders have started taking interest rates into their own hands, while the RBA sits on there's.

So why are the banks increasing their rates? 

Simply put, the ”Trump effect” set the expectation that higher inflation is on the horizon, causing bond rates to soar, which increases the bank's costs of acquiring funds. 

There has also been recent pressure from APRA & ASIC to tighten lending policies and limit growth on both investment and interest-only lending. The easiest way for lenders to do that is to increase their interest rates in these areas and make owner-occupied and principal and interest loans more attractive. As each unique lender needs to rebalance their loan book, there is now a battle to attract the right lending business to remain compliant.  

Whilst out of cycle changes to fixed rates are not unusual, what isn’t as historically common is increasing variable rates and penalising those making interest only repayments. This is fuelling media coverage at the moment and causing uncertainty amongst borrowers. Rates now not only vary from lender to lender but also within each lender's own product offering, depending on their appetite for property and/or repayment type at the time! Confusing times for borrowers to say the least.     

What does this mean for me?

Even a small increase to your interest rate can make a big difference.  Let’s take an average $400,000 loan:

0.25% increase = $83 extra interest payable per month.

1.00% increase = $333 extra interest payable per month - That’s $4,000 of your post-tax annual income!

Should I fix my rate? 

There's no one size fits all answer to this. There are still competitive fixed rates available promising peace of mind for the next 1-5 years, but before jumping in you must consider whether fixing fits in with your long-term plans. There are downsides, including break costs and lack of flexibility. You may find that locking in a better discount off your variable rate loan to counteract the blow of a raise or two suits you better.

What if I want certainty without constraints? 

A loan made up of a fixed and a variable rate portion may be a good option for you. The fixed amount can tick away at the guaranteed rate, whilst the variable split can still have a great discount applied, an offset account attached, and the ability to make extra repayments without being penalised.

How much should I fix, and for how long? 

You need to weigh up how long you’re likely to own your property if you’re likely to sell without buying again, and your potential to save and/or make extra repayments over that time.

Should I switch to principal & Interest repayments? 

There was probably a reason you decided to opt for interest only repayments with a linked offset account when you set up your loan. It may have been based on concerns around cash flow now or in the future (e.g change of employment, starting a family, high school fees etc.) or because you plan to make the property an investment property in the future. These are still factors which need to be carefully considered before you make a change, especially as lenders do not make it as easy to switch from principle and interest to interest only if you change your mind down the track. However, you may find that P&I repayments would now work better for you, so it's definitely an ideal time to explore your options. 

Before panic over repayments sets in, have a chat with one of our Lending Specialists. We can help you decide on the best way to structure your loans, compare your current lender’s offer to the market, negotiate rates on your behalf, and walk you through your options to ensure you’re in the best position to weather the imminent rate rises... 

Josh Durrant  - Director/Senior Lending Specialist. 

To review your loan simply contact us on 03 9686 4976 or request a review here.