Two top tips to contend with rapidly rising interest rates
Interest rates are on a seemingly unstoppable upswing but there are measures borrowers can take to help alleviate some of the financial strain.
With interest rates this week hitting 3.6 per cent and the big four banks as eager as ever to pass rate increases on immediately, many households are feeling the heat.
It’s entirely possible the RBA will bump rates up by another 0.5 per cent or 0.75 per cent, given they’re on a mission to shock the economy and Australians into curbing spending at a time of widespread housing supply challenges.
I anticipate between the end of this year and the middle of next, the cash rate will be back to 2.5 per cent, which is in line with the ten-year average.
Confusion reigns over finance planning
It’s certainly been a confusing time of late for property investors and the broader Australian community, with wildly varying predictions about future interest rate hikes and the implications for property prices.
My advice to all property investors is to avoid taking a short-term view. Every housing market is different but I think some of the smaller capital cities and regional markets, like Brisbane, are just taking a breather.
While it is crucial to do the numbers and ensure your budget can handle further rate rises, with rents increasing and demand for rental properties guaranteed to escalate, you really can’t go wrong. More than 300,000 people are set to migrate to Australia in 2023, the vast majority of whom will be looking for homes to rent.
There is only so much land and as our population grows, the value of that land will increase.
Managing interest rate risk
So, to my two top tips on managing interest rate risk.
None of us can control what the Reserve Bank does, but here are the two things you can put into action straight away.
1. Make your bank work for it
We all have the opportunity to shop around for the best interest rate available. On average, an existing customer of a bank pays at least half a percent, and in some instances a full percentage point, more than a new customer is offered.
It is worth the effort to look up what your bank charges new customers, give them a call, and try to negotiate a better rate. A mortgage broker can also help you identify better deals at alternative banks. It may well be that you have to take your business elsewhere.
This simple step could save you several thousand dollars a year. Same goes for insurance policies. Now is the time to do the research and keep your bank and insurer honest.
2. Observe, don’t obsess
Yes it is important to keep up to date on interest rates and other key financial indicators, but it is counter-productive to let it become all-consuming.
My advice is to observe, but not obsess over interest rates.
Remember, the last time the cash rate sat at 2.5 per cent pre-Covid was 2014. We are in the process of getting ‘back to normal,’ and normal could even mean interest rates get back to 1 per cent like they were during the pandemic.
With the benefit of hindsight, it’s broadly accepted that interest rates were kept at near zero per cent for at least six months longer than they should have, so the RBA is having to increase rates to catch up.
Interest rates won’t stay this high forever. Put in place a rigorous cash management plan for the next six months, but prepare to look around corners so you are in the best possible position to prosper on the other side.
When interest rates return to normal, expect another surge in property prices in some parts of Australia.
How could it be otherwise? We already don’t have enough houses, and we’re bringing at least 300,000 people into Australia to fill jobs and grow the economy.
Make sure you don’t lose focus on the bigger picture.