Rates rise, RBA signals more to come

The Reserve Bank has increased official interest rates by 0.25 percentage points to 5 per cent, lifting repayments on the average $180,000 25-year home loan by $30 a month. In announcing the lift, the tone of the RBA's statement suggests that unless current domestic and international conditions change direction markedly, there will be more rate rises sooner rather than later.

Today's rise will see the standard variable home loan interest rates of the major banks will climb to 6.82 per cent over the next ten days or so. It is the first change to official interest rates in 17 months.

The RBA said that an improving world economy and a stronger local economy means that the low, stimulatory levels of interest rates we've had for so long are now no longer appropriate. The Bank specifically singled out the “behaviour of borrowers” and said that excessive borrowing by households “shows no sign of abating”. This threatens to inject an unsustainable imbalance into the Australian economy, the statement says. In these circumstances, this first small quarter-percent rise in rates can be expected to be followed by more such increases – as soon as December or February.

Record household debt levels mean it may not take a rise in rates of more than 0.75 to 1 percentage point to have the desired effect in reining in borrowing levels. In a recent Infochoice online poll, 18 per cent of respondents said they could not cope with any interest rate increase over the next year while a further 22 per cent said they could only handle rises of less than 1 percentage point.

Infochoice spokesperson Denis Orrock says, however, “there a number of simple steps that borrowers can take to avoid placing their biggest investment at risk”:

Existing borrowers

  • make extra repayments where possible to reduce your exposure to higher rates and falling prices
  • consider switching at least part of your loan to a fixed rate BUT check the repayment flexibility of fixed arrangements.
  • consider carefully further borrowing against the equity built up in your home – can you afford higher repayments if rates are 8 per cent or more?
  • Use home equity finance to consolidate existing higher-interest debt at the lower home loan rate, rather than for further spending.

New borrowers

  • allow for higher interest rates of up to 2 percentage points when budgeting for repayments over the next few years
  • don't rely on lenders to determine what is a manageable loan amount, borrow what's right for your circumstances
  • maximise your deposit and try to keep your LVR as low as possible, 90 per cent at the most
  • ensure personal debts like credit cards and car loans are under control before committing to a property loan.

Investors

  • lock in tenants for as long a lease as possible, even if it means accepting a lower rent
  • avoid buying apartments in areas where large amounts of new construction is coming on line.

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