It fascinates me how so many people who are worried about their finances don’t know what rate they are paying on their current home loan.
And many people don’t seem to realise that they could be saving a lot of money by simply doing some homework and taking the time to help their precious hip pockets.
Is this you?
Hopefully this three-step interest rate guide it will help you defend your wealth against rising interest rates that are set to hit us over the next two years.
Step one: Understand how high-interest rates can go
The worst-case scenario for rate rises looks like this – seven rises of 0.25 per cent each between May and December.
This could take the cash rate of interest controlled by the Reserve Bank of Australia (RBA) to 2.1 per cent by the start of 2023.
I don’t think this will happen and would expect a cash rate of this size by the end of 2023, not by the start of the year.
But we’ve had the first increase, so there could be five hikes ahead by the end of the year.
Plenty of economists think the cash rate will rise by the end of 2023 to 2.5 per cent. So, in total, we’re talking about a 2.4 per cent rise over two years from where interest rates were before the RBA started to push rates up.
What does this mean for you and your home loan?
If you’re on a two per cent loan, your home loan rate could go to 4.4 per cent.
If you’re on a three per cent rate now, get ready for 5.4 per cent by 2023, if the worst-case scenario works out to be right.
By the way, some crazy economists think this could happen by year’s end but I doubt the RBA would be so stupid.
Step two: Work out what will happen to your repayments
A rule of thumb is that if you have a $500,000 loan, each 0.25 per cent rise adds about $65 a month to your repayments.
The cash rate is now 0.35 per cent, so let’s say there could be seven more 0.25 per cent rises between now and the end of 2023, as suggested above.
Seven times $65 equals $455 a month for someone on a $500,000 loan – that’s $5,460 per year.
This is why I don’t think the RBA will take the cash rate so high – because it would knock out so many home loan borrowers.
Step three: Protect yourself
Now you’ve understood how high-interest rates could go, and what would happen to your repayments. It’s time to do some homework to protect your bank balance.
Given the two-year timeframe for rises, I’d look at three-year fixed rates if you want to lock in a rate to escape a potential $5,460 (or higher) annual whack to your repayments.
The best rate I’ve found is 3.84 per cent for three years at Heritage Bank. Macquarie has a 4.79 per cent rate, and others are offering around 4.5 per cent.
If you’re on a two per cent loan, the 4.5 per cent fixed rate makes you pay the higher rate others will pay in two years’ time, now.
This means you have to take the punt that you might be better off sticking with the variable rate and accepting the slower drip increases over the next two years.
This might be an even smarter play for someone who might now be on a three per cent plus home loan and therefore should try and refinance now to the lowest rate possible.
Right now, Nano Home Loans’ rate is 1.99 per cent, Athena has a 1.89 per cent rate, HomeStar a 1.79 per cent rate (with a comparison rate of 1.84 per cent).
Of the well-known lenders, ING has a 2.09 per cent loan and Suncorp has a 2.02 per cent loan, but always check the comparison rate of interest as well, as this adds in charges and fees that push up what you really pay.
This is important as one lender has a nice-looking 1.99 per cent home loan but the comparison rate is 2.47 per cent, which is a big difference.
Trying to guess where interest rates will go is a gamble.
My best guess is sticking to the variable rate might be better than bumping up your payments big time so early in the rate rise cycle.
This isn’t advice but it should prove to be a pretty good financial education.