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Be prepared for interest rate rises

Kate Cowling avatar
Kate Cowling
- 3 min read
Be prepared for interest rate rises

Sometimes the dream of owning a new home can override our basic common sense when applying for a home loan. No one likes to plan for when things go wrong but those who are smart, always will. Taking out a home loan with repayments that are just within your budget doesn’t allow you much room for interest rate rises and this is where Aussie borrowers get in trouble.

The affect that any interest rate rises will have on borrowers with home loans depends on a number of factors including whether their loan is fixed or variable, the balance owing on the loan, how much their financial institution increases their interest rates by and for how long.

When interest rates rise, borrowers with variable rate home loans are the most affected as this means that their repayments may increase as a result. If they haven’t factored the possibility of any interest rate rises into their budget, when they worked out how much they could afford in repayments, then they may feel the pinch financially which is usually called ‘mortgage stress’.

To determine if rates will rise or not, on the first Tuesday of every month (except for January) the Reserve Bank of Australia (RBA) meets to determine the official cash rate, which is then announced to the public. They will announce one of three things:

  • If the cash rate will rise;
  • If the cash rate will remain the same; or
  • If the cash rate will decrease.

There are a number of factors that affect the cash rate including housing, employment and inflation. Depending on the status of the economy and which factors have seen growth or a decline will depend on what happens to the cash rate. For instance, when the global financial crisis occurred in mid 2008 the cash rate increased and the average fixed and variable mortgage interest rates increased as a result. Then towards the end of 2008 the cash rate decreased and as a result the average interest rates for home loans declined.

In order for borrowers to protect themselves from interest rate rises some choose to fix their interest rates, especially when the rates are low as this means that they can lock in a lower rate for a fixed term, usually up to five years. The major benefit of fixing your mortgage is that if interest rates rise higher than what they fixed with, they won’t be affected while they are fixed. At the end of the fixed term the interest rate then reverts to the standard variable interest rate.

Are you sniffing around the current Australian housing market, looking for a great deal? There are plenty of great home loan deals waiting to be discovered. Kick things off by comparing some fantastic Aussie home loans and calculating your would-be home loan repayments.

Disclaimer

This article is over two years old, last updated on September 15, 2010. While RateCity makes best efforts to update every important article regularly, the information in this piece may not be as relevant as it once was. Alternatively, please consider checking recent home loans articles.

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