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Interest rates to hit 5 percent in 2010

Interest rates to hit 5 percent in 2010

Jack Han investigates the how to get the best home loan deal while interest rates are on the rise.

November 30, 2009

The recent interest rate rises may be just the beginning of a long climb, with economists predicting that the Reserve Bank cash rate will rise to 5 percent by Christmas 2010. With average home loans of $267,000 in September, the rate hike could see households on a 25-year home loan paying an extra $240 a month.

More and more Australians will be affected by these rate increases, with research showing that the proportion of households paying off a mortgage is rising. CommSec housing data has shown that 35 percent of households now have a home loan, up from 30 percent a decade ago.

“The economy has become far more sensitive to higher interest rates with the proportion of people owning their homes outright continuing to slump,” said Chief Economist Craig James.

Further rate hikes are foreshadowed by the Reserve Bank, which expects economic growth to be higher than 2 percent for financial year 2009-10 and improve to 3.25 percent for the next financial year.

Spelling the end of historically low rates, the window of opportunity for cheap bargains is closing fast for home buyers. This means that prospective home owners will have to act fast over the next few months to lock in stand-out offers before the next rate increase.

The good news is that this is also a crucial time for big banks to remain competitive, or otherwise smaller lending institutions will gain valuable market share by offering below-market rates.

The bad news is that shoppers will have to be extra careful when comparing home loans because sometimes these low introductory rates hold a few surprises in their terms and conditions.

If you’re not careful, what looks like an especially low rate could transform into an unreasonably high one after the introductory period is over, or in the event of a missed payment.

Here’s what to look out for:

  • Always make sure you’re looking at the right rate. The advertised rate is different from the real or comparison rate, which takes fees and other costs into account.
  • Unusually low rates sometimes have a catch, such as a short introductory period, a high deposit, or they will ask you to bundle your other debts. Make sure you find out what it is.
  • Keep your options open. Consider a lender you’ve never heard of before, or letting go of features that you don’t need. These could all save you thousands.

Rates are rocketing high in 2010, so the only way to protect yourself is to compare home loans, so that you can rest easy knowing that you’re always paying the lowest interest.

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