High Interest Rates, Inflation, Financial Hardship: Here’s How You Can Prepare

The Reserve Bank of Australia (RBA) has begun raising its cash rate target, after more than a decade of low and falling cash rates. And the central bank anticipates several more rate hikes over the next two years.

RBA Governor Philip Lowe says Australia’s cash rate will increase to about 2.5%, with inflation perhaps reaching 7% by the end of 2022 and not likely to fall until early 2023. This would add more than 2 percentage points to the interest rate on most homeowners’ mortgages. He notes that the central bank is still working on getting inflation to its target of 2-3%.

How High Will Interest Rates Go?

If you’re a homeowner or a potential borrower, you might be wondering anxiously how high mortgage interest rates will rise.

The four major banks have all released their predictions for the changes in the cash rate over the next few years. By November, experts from the big banks predict, we’ll see a cash rate starting with a 2.

Big Four Banks’ Cash Rate Forecasts, 2022-23

Disclaimer: Keep in mind that these are just predictions and that the big banks are subject to change these forecasts. Things to note:

• You might need to brace yourself for a surprise if you currently have a fixed-rate mortgage. Variable rates are much higher now than when most borrowers with fixed rates began their fixed term. It’s tempting to go straight into another fixed-rate term but, unfortunately, many fixed rates are not competitive right now. Speak with Home Loan Experts before refixing your loan rates.
• Your home loan repayments could become much more expensive over the next two years if you have a variable-rate mortgage and your lender fully passes on these rate increases.

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What Can You Do To Prepare?

Cut expenses

Budgeting is a simple way to track spending and set reasonable expectations for how much you’ll spend on living expenses. Once you start using a budget, you will identify what things you’re spending on unnecessarily. You should also go through your bank and credit-card statements and see what regular expenses you can reduce or cut altogether. This will help save considerable sums of money that you can use for rising mortgage repayments or emergencies.

Secure income

The job market is strong now; however, as rates rise, this could change. And even in a strong market, anything from a new competitor to a merger, changes in the economy, political shifts or new management can leave you unemployed or earning less income. Working for a large, stable company can lower the risk of this, but it’s no guarantee of job security. It’s best to be cautious about changing jobs during this time.

Additional income

Making a little extra money each month through a side business or part-time work could help you out. You could also discuss taking on extra work or hours with your employer. Any extra income can help you save and prepare for higher rates when inflation is raging throughout the economy.

What If You’re Facing Financial Hardship?

Here are some ways banks and lenders assist customers who are having trouble meeting their home loan repayments:

• A mortgage ‘freeze’ or ‘repayment holiday’, which lets you pause making mortgage repayments for a set amount of time, often 3-6 months.
• An extension of your loan term to 30 years if you’re currently on a 15- or 20-year term; this allows you to reduce the size of your repayments.
• A switch to paying just the interest on your loan for the next year or two will reduce the size of your repayments.
• Adding overdue repayments to the loan balance, so you are no longer in arrears and being charged late fees.

Additionally, these are the top 10 strategies for when your home loan is in arrears.

These are some options Home Loan Experts can help you with:

• Refinancing to a lower interest rate or interest-only repayments.
• Releasing equity to give you cash if your income may be affected.
• Debt consolidation to make repayments manageable.
• Switching your fixed-rate or variable-rate home loan plan.
• Accessing available redraw funds.

Could This Be An Opportunity For You?

If your employment is secure and you’ve got surplus funds, rising rates may be a buying opportunity for you. Many of our customers are getting pre-approved and reaping the benefits of rising rates by purchasing property as first-home buyers in a falling market.

Call us on 1300 889 743 or enquire online today, and we’ll assist you in finding a lender with a deal that suits your requirements and situation.