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FUTURE RATE INCREASES

The RBA has recently increased the cash rate as follows:

 +0.25% (to 0.35%) on 03/05/2022
+0.50% (to 0.85%) on 07/06/2022

 +0.50% (to 1.35%) on 05/07/2022

There is a now a general consensus amongst economists that they expect the RBA to continue to increase the cash rate by between 0.75% and 1.75%.  

Average Forcasted Increase*

 +1.30% (to 2.65%) as at 04/07/2022

*Source: AFR -Economist Quarterly Forecasts
 

We are being asked by a lot of clients if they can fix in now to avoid rates going up. Unfortunately, the horse has already bolted and all lenders have already factored in future increases. For example, one leading lender has the following rates for an owner-occupied loan.

DISCLAIMER - We cannot predict the future and the purpose of this post is to provide the reader with information to assist in making an informed decision. Your circumstances will be unique so please speak to a broker or financial specialist about your unique needs.

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CURRENT RATES FROM A LEADING HOME LOAN LENDER
 

Variable Rate:        3.34%              (Full Doc, P&I 60% LVR)

Fixed 1 year:            5.25%              (+1.45% above the variable rate)

Fixed 2 year:           5.85%              (+2.31% above the variable rate)

Fixed 3 year:           6.05%              (+2.65% above the variable rate)

Fixed 4 year:           6.09%              (+2.81% above the variable rate)

Fixed 5 year:           6.15%              (+2.91% above the variable rate)

 

FIXED RATES ALREADY HIGHER THAN VARIABLE

This above lender has therefore factored in quite a number of rate increases in the next 1-5 years.
The 3 year rate above is 2.51% higher than the variable rate so they have factored in 10 increases of 0.25% increases each. 
 
If the economists are correct -the variable rate may increase by 1.30% and not 2.51%

FIXED - is all about comfort, as you know what you will pay for a set period. It’s like paying an insurance premium.

So, if you think that rates will increase by 2-3% in the next 1-2 years, it may be worth fixing.
If you decide to fix in rates today – that new rate starts immediately and yet we know the variable rate is much lower and likely to be lower for at least the next few months.  We don’t know how quickly or by how much rates will increase.

 

VARIABLE - If you go or stick with variable, and initially pay more off your loan, if the rates do retreat (which some experts have suggested they may in 18 months to 2 years), then you’ll be out in front.

You could start paying an amount into your loan now, that’s equivalent to a rate of 5%.

This would enable you to get ahead of the curve, and if rates do increase, you’re already meeting your payment obligations … and you’ll have the extra cash in redraw.

RECOMMENDATIONS                                             

We have prepared some ideas to help you during this period
 

BE PREPARED

Update your budget and see how much your mortgage will increase when rates go up.
Premium Broker has a number of calculators at: https://www.premiumbroker.com.au/repayment

 

CONSIDER FIXING IN YOUR RATES
It is probably too late to fix in a good rate – however it may still be worthwhile for your circumstances. Beware that the fixed rate will change at the end of the fixed rate period and restrictions relating to  fixed rates.

 

NEGOTIATE A BETTER VARIABLE RATE
It may be a good time to review your current rate – contact your broker and see if we can negotiate a better rate with your lender or maybe refinance to a cheaper lender.  If we can save you 0.25% or 0.50% then this will provide a buffer against a couple of rate increases. It will also benefit you at the end of a fixed rate period (if you chose to take a fixed rate).

 

PAY MORE OFF YOUR MORTGAGE
If you are currently paying 3% on your mortgage – consider increasing the repayments to the same amount if rates increased to 5%. This way if rates increase 2% you will already be accustomed to the higher instalment amount – you will have also saved money by paying off your loan quicker.

 

Example of a higher repayment
$2,108 pm       $500,000 3% P&I Loan over 30 years

$2,684 pm       $500,000 5% (2% increase) P&I Loan over 30 years

To do this you can contact your bank to arrange to pay a higher amount.

We also have a calculator on our website which can help with loan repayment calculations.  Just make sure you use the same remaining term as your current loan.

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