Are you ready for the next interest rate rise?

It’s nine months since the last interest rate rise by the Reserve Bank and while opinions vary on the timing of the next upward swing, one thing is certain – interest rates cannot remain at historically low levels.

At its September meeting, the Reserve Bank of Australia decided to maintain its cash rate at 4.75 percent due to the continued unclear outlook for the global economy and Australia’s weaker than expected near-term growth outlook. This has prompted economists to declare a rate rise unlikely this year, but likely to strike in 2012.

If your household is at capacity with its spending, an increase in your mortgage repayments could be the trigger that tips your over the edge. However, there are simple steps you can take to lessen the blow.

How to prepare

“The first thing people should do is review their cash flow and budget to ensure they know where their money is going,” said Brad Fox, president of the Association of Financial Advisers.

“We recommend people operate with a cash surplus as an extra buffer when an interest rate rise happens.
He said the size of your cash surplus will depend on your income and your mortgage repayments.

“It’s more to do with controlling spending and providing a discipline so you don’t accidentally spend more that you should,” Fox said.

The next important step is to work out ways to slash your spending so you can funnel the extra cash into increased mortgage repayments. Fox recommends reviewing what you pay for things such as insurance and utilities, and changing providers to save money.

“But before changing, you should make sure you weigh the benefits you are losing against the benefits you are gaining,” he said.

Reviewing and cancelling unessential subscriptions can also save you money in preparation for a rate hike. These can include club memberships, internet accounts, magazines and Foxtel.

“Another strategy could be to reduce the debt on your mortgage by selling unnecessary assets,” Fox adds.

“That could be selling furniture on eBay or those Telstra shares you bought 10 years ago.”

You can also consider a fixed interest rate for part or your entire home loan.

“The unfortunate thing here is that by the time most people consider fixing the rate, it’s already too late,” Fox said.

“Most importantly, don’t put your head in the sand and take active steps to take control of debt. Controlling debt is essential to achieving financial security.”

Compare home loans in Australia