Leading banking comparison site Infochoice.com.au has warned many Australians are inadequately prepared to cover the rising costs of home loan repayments following the anticipated return to more ‘normal’ interest rate levels in the coming months.
“We may be enjoying near 20 year record low interest rates at the moment, but if you listen to the RBA, the government, economists and most importantly the banks, a return to higher interest rate levels is almost guaranteed, and soon,” said InfoChoice CEO Shaun Cornelius.
According to Mr Cornelius, future rate rises will have a significant impact on consumer bank balances, some of whom may be forced to take drastic measure to save their homes.
“In the case that your current financial situation does not allow for rate increases you could end up in a position where you would need to earn an extra $17,000 per year (before tax) to cover the extra repayments on a $500,000 home loan,” Mr Cornelius said.
“Consumers must plan ahead now to avoid having to take on a second job or even worse, losing your home,” he said.
Cornelius cautions that when it comes to interest rates, what goes down must also eventually come up.
“While many home loans are currently offering rates as low at five per cent and sometimes even lower, consumers mustn’t forget that just 18 months ago similar home loans charged around 8.50 per cent,” he said.
“While those with an average home loan of $300,000 are currently $662 per month better off, these low rates will not continue. Key indicators point to increases starting as early as next week Tuesday when the RBA meets.”
Mr Cornelius reminds consumers that while official rates may not rise significantly in the immediate future, actual Home Loan rates are not directly tied to RBA cash rate changes.
Over the past 12 months, RBA cash rate decreases have pre-empted proportionately less decreases in actual home loan rates. While the RBA cash rate has decreased by 4.25 per cent since March 2008, average home loan rates offered by the Big Four have reduced only 3.84 per cent.
“The banks argue that their true cost of funds is influenced by other factors, as they rely on wholesale funding,” said Mr Cornelius.
“If this holds true, there is a strong chance that a small increase in the RBA cash rate will result in a significantly higher increase in actual home loan rates charged by the banks.
“I would not be surprised to see a 0.25 per cent increase in RBA rates next week translate into a 0.50 per cent rise in actual bank rates. Even if the RBA does announce a rate decrease in the coming months, I suspect the banks will increase rates regardless,” he said.
“The big question is whether Australians are ready and able to deal with a two to three per cent increase in home loan rates.”
According to InfoChoice figures, a three per cent increase in interest rates will translate to extra repayments of $561 per month on a $300,000 home loan, and an extra $936 on a $500,000 loan.
InfoChoice advises consumers preparing for interest rate rises to follow three simple rules.
* Minimise your home loan balance by paying off as much as you can (over and above your minimum monthly repayments)
* Consider re-financing. If you are paying more than 5.50 per cent on your mortgage, you can probably get a better deal somewhere else.
* Keep track of the interest rates on your mortgage as well as other offers available by visiting online comparison sites such as Infochoice.com.au.
Source: Infochoice.com.au
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