In December 2021 the Reserve Bank Governor Philip Lowe was still stating it was unlikely interest rates will increase until 2024, however in recent months we have now seen multiple rates rises in the cash rate, with indications of more rate rises coming this year, to combat the inflation figures that were supposed to be only transitory due to the supply chain issues from the pandemic.

 

While it is still not clear if the current inflation numbers will continue to rise or will drop rapidly in early 2023 (as RBA chief has predicted) we do not know. With record low unemployment numbers, the risk for wage price inflation is now real. RBA opinion appears to be that the cash rate settings need to be a lot higher than they are currently to deal with the economic numbers we currently have.

Highly experienced Economists like Bill Evans (Westpac) have predictions of the cash rate settling at around 2.65% by 2023, which would be a further increase in variable interest rate of 1.3% from the current cash rate of 1.35% at the time of writing in late July. Some market analysts and the ANZ economist have estimated a higher cash rate around 3.5%, so around 2% more than current cash rate.

So, whatever happens with the cash rate it will be higher as we move forward from July 2022. If you are on a variable rate, you will be faced with higher minimum repayments progressively and your lender will communicate via email or letter to inform you of the new minimum repayment required on your loan. Another way to check what is the minimum repayment is online banking, select the loan account then choose the loan info or loan details tab to check minimum repayment required. Note also that the increase in the actual rate normally takes effect a few weeks after the announcement, so for July, RBA meets first Tuesday of the month, lender takes a week to confirm what they are doing with their variable rate change, but it would normally take another few weeks before the actual rate on your loan is changed. This gives time to process the communication and make the changes on their computer systems.

At Total Choice Home Loans we can review your variable rate to check if it is still competitive against other variable rates available in your specific scenario, as different equity positions, aggregate loan sizes and other factors affect the actual variable interest rate for which you can qualify.

 

We can compare your current variable rate to alternative rates, including the fixed rates, however these have now increased rapidly and significantly in recent months so that the fixed rates are a lot higher than the variable rates, in anticipation of higher future variable rates.

 

While fixed rates do provide some certainty and comfort against future variable rate rises, the fixed rate is only valid for a few years depending on the term chosen, and is higher the longer you want to fix for, (less risk, higher cost) and will revert back to the variable rate of the day, so if the fixed rate is 2% higher than the current variable rate you would really have to expect a more significant increase in the variable rate to make it worthwhile fixing.

The fixed interest rates are so much higher than the variable we do not see value for most clients (depending on what variable rate they qualify for) now on a fixed rate; however each individual client should seek advice on this as there are exceptions to this. We are finding success with a lot of clients getting a better (lower) variable rate on their loan by refinancing to a new lender if the current lender is not willing to offer a better renegotiated rate. Anyone can ask their lender for a better rate, then we can review against what else is available in the marketplace from our panel of lenders.

For those concerned with the increase in repayments, it would be a good time to review what you are spending of your net income. As the loan repayments have been at record lows, many clients will not have yet had to deal with an increasing rate environment which can be stressful, as most people would get used to a lower repayment and their budget would be used to a certain repayment.

 

Now that a higher percentage of net income will be going towards a loan repayment, a spring clean or review of where your hard-earned income is going would be a good idea. There is an excellent budget tool free online from the government which is available in the moneysmart.gov.au website, among other great calculators.

 

Link here: https://moneysmart.gov.au/budgeting/budget-planner

With inflation everywhere now, increased petrol prices, food, and products, without wages increasing to cover these increases, the loan repayments increasing will affect a household budget, so having a good idea of where the money is being spent is very important, and so if you are concerned with increased repayments, start here. Once you have a better handle on household spending you can identify areas that can be cut back or eliminated until income can be increased.

Lastly, for those who have had a loan for over 4 years or so, their minimum repayments would have reduced but most lenders will leave the actual direct debit amount on whatever the repayment was (at a higher rate) so most clients will have been paying higher than the minimum repayment over the past 2 years anyway, so it should be less of an impact if they haven’t reduced the direct debit to a lower amount.

 

Total Choice can review your loan product and rate to see if there is a better alternative in the market, there are a lot of deals available to those who qualify, with normal credit criteria and assessment needed, but worth a look to save money in this higher inflation world.

July 21, 2022by jonathan