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Interest rates are up! Is this going to blow our budget?

There is always a stress-filled buzz in the air every time the big 4 banks decide to hike up interest rates. In mid-September three of the big banks rose to the occasion …

There is always a stress-filled buzz in the air every time the big 4 banks decide to hike up interest rates. In mid-September three of the big banks rose to the occasion with NAB hanging back from lifting home loan interest rates, at least for now. Westpac started the ball rolling by raising their rates on September 19 to 5.37%, followed a week later by CommBank (5.36%) and ANZ (5.38%).

Laying the blame

“Higher wholesale funding costs” are being blamed which basically means that the banks increased interest rates due to the overseas cost of funding going up. This would sound quite plausible except for the fact that the profits the banks will make is double what the overseas cost of funding has gone up by. The rate increases have also covered the ‘losses’ the banks may experience when offering lower rates to new customers.

Questionable loyalty

As you are probably aware, banks advertise low rates to entice new customers. BUT, after you, the new customer, has jumped on board, you become an ‘existing’ customer and more often than not, you’re not eligible for any of the new so-called lowered rates. On top of that, once you become an existing customer your rates may slowly start to increase, so the question of bank loyalty to their customers is well…just that…questionable. It’s just another win/win for the banks…again!

Don’t worry, be happy

You might hear yourself singing, “What about me, it isn’t fair, I’ve had enough now I want my share. Can’t you see I want to live, but you just take more then you give”. Yes, it’s the karaoke catch cry of the ages and I totally get it, but I have to tell you that there really is no need to stress out about a 0.15% rate increase. It was only six short years ago that the standard variable rate (SVR) was sitting at 6.80%, so in comparison, rates today are still super low at around 4%. To give you an example, a 0.15% rate rise on a $500,000 home loan will cost you an extra $14 a week. Rising petrol prices and cost utilities will hurt your hip pocket more than $14 on your home loan.

2 ways to minimise your stress levels

With that said, $14 is still $14, so I advise property owners to do one of two things to minimise the stress of an interest rate rise:

  1. Work out your repayments based on 6% and pay that into your home loan, or offset account.
    This will help you pay off that 30 year home loan a lot quicker than 30 years and, if rates do go up, you already know you can afford it without your cash-flow being affected.
  2. Fix your interest rate for a period of time.
    Speak to us about the pro’s and con’s of fixing your home loan. Fix for peace of mind ­­— not to grab the lowest interest rate. That said, 6 years ago, in order to fix (and get peace of mind), you were fixing around 1.5%­­–2.0% higher than the variable rate. People still fixed their loans because they wanted the peace of mind that fixed rates bring. Now though, you can fix for around the same rate as the variable so it’s something to think about.

Read more about fixed rate loans or give us a call on 02 6188 4555.