Be Prepared for, but not Fearful of, Interest Rate Rises
With interest rate rises on the horizon one of the nation’s most awarded mortgage brokers has advised borrowers to be prepared for, rather than fearful, of increasing mortgage repayments.
2021 Australian Mortgage Awards Independent Broker of the Year and Zippy Financial Director and Principal Broker Louisa Sanghera said scaremongering about the potential negative impact of rate rises on borrowers was not in-line with the reality for the vast majority of mortgage holders.
“If you have a home loan and you haven’t checked out its finer details in the past year, now is the time to do so.”
“For some borrowers, this may well be their first-ever rate rise – but many of those same property owners have also experienced once-in-a-lifetime increases to the values of their homes or investment properties over the past year,” Ms Sanghera said. “Property buyers who purchased prior to the pandemic are also generally better off by hundreds of thousands of dollars, with investors also benefiting from strong rental price growth over the same period. “This means that their overall net worth has put them in a far better position that if they had never purchased because of an unrealistic fear of interest rate rises, which are a normal part of monetary policy let’s not forget.” Ms Sanghera said mortgage brokers and lenders had also been assessing a borrower’s serviceability using an interest rate that is three percentage points higher than the actual rate on their mortgage – the equivalent of 12 increases of 25 basis points – so they had a built-in financial buffer already included. “More recent borrowers have the ability to manage higher mortgage repayments, because it was built into their home loan applications from the outset,” she said. “No one is expecting interest rates to rise rapidly, rather, it is much more likely that we will see incremental increases of 25 basis points over a period of number of months. “It’s also vital to understand that interest rates have been at record lows for more than a decade – well before the pandemic arrived on our shores – so we’re unlikely to see rates soar to six or seven per cent anytime soon.”
With the potential for rates to rise this year now an accepted fact of life, Ms Sanghera said borrowers still had time to prepare themselves in advance for that eventuality. “If you have a home loan and you haven’t checked out its finer details in the past year, now is the time to do so,” Ms Sanghera said. “Many banks will offer new customers a lower interest rate than they do their existing borrowers, so that means your deal from two years ago may not be the best one now.” She said borrowers should also use an online mortgage calculator to understand what any changes to their repayments would be when rates do rise. “Once you know how much the difference is, look at your budget to find ways to set this money aside now. This way you’ll know you can afford the repayments when rates rise, and you’ll build up a small nest egg to help you deal with any additional rate increases when they flow through,” Ms Sanghera said.