Rate hike warning for 2013

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Borrowers are being urged to prepare for interest rate hikes as early as next year, on the back of strong economic growth forecasts for 2012.

The National Australia Bank (nab) said improved conditions – and modest signs of growth – will encourage the Reserve Bank to lift the cash rate around the middle of 2013, after leaving it on hold for the rest this year.

"We see rates lifting a touch in the face of rising mining investment, a strengthening labour market and higher inflation," nab said in forecasts accompanying its monthly business confidence survey published yesterday.

The cash rate has been on hold at 3.5 percent since a 25 basis point rate cut in June, which followed a 50 basis point reduction in May.

RateCity found that a 25-basis point rate hike would cost the average borrower around $50 more per month, based on a $300,000 home loan.

Michelle Hutchison, spokeswoman for RateCity, said predicting rate movements so far in advance was difficult, given the volatility of European markets.

"Rates could really go either way, depending on the outcome of the situation in Europe. But the Reserve Bank cash rate is below the normal levels, which means rates are likely to rise eventually," she said.

"Whether interest rates rise next year or in three years, borrowers should be preparing now to reduce the impact."

Borrowers should have a savings "buffer" of at least 2 percent, which equates to around $400 per month for a $300,000 home loan, according to RateCity calculations.

"The best strategy, if you've got a variable rate mortgage, is to increase your repayments as much as you possibly can," she said.

"Every dollar you pay ahead of time will both reduce the length of your loan, and make you less vulnerable to the next rate rise. In fact, paying down debt (especially non tax-deductible debt) is the best way to get ready for any rate rise."

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