Avoiding the bite of rate rises means listening for the bark

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November 09 2021
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Stop asking when rates will rise; start thinking about what to do about it.

Avoiding the bite of rate rises means listening for the bark

As Australia’s banks begin to hike their fixed home loan rates, their customers might want to start thinking about what that means for them.

WLTH head of lending Catherine Mapusua said that a shift away from thinking about when interest rates might rise and towards what living in a world with higher rates looks like was prudent.

“With improving economic conditions and banks scrambling to announce interest hikes, it is wise to start preparing for this shift in the interest rate environment,” she said.

Ms Mapusua recommended consumers consider whether a fixed rate suits their needs, as it can restrict additional repayments and leave them on the receiving end of a break fee if their circumstances change.

“If you change banks, sell the property, or need to break the rate of your repayments, you risk charges that can be from a couple of hundred to several thousand,” she said.

To avoid being caught out, Ms Mapusua said consumers should consider paying a lock fee.

“This can help secure your fixed rate on offer at the time of settlement, protecting you from rate increases before the loan is advanced,” she explained.

Those with a variable rate mortgage also might want to think about fixing part of their rate sooner rather than later.

“Given the speed at which rates rise and the challenge in predicting the climb, speak to your provider to guide you through a ‘stress test’ to determine what your future financial position looks like,” Ms Mapusua said.

Many of these concerns were echoed by RentBetter chairman Tony Breuer, who argued that all indications now suggest that the interest rate cycle is at a turning point.

“For those investors that have not already fixed rates, this will mean in the first instance a sharp reduction in free cash flow.,” he predicted.

With current interest rates as low as they are, Mr Breuer warned that even a small increase in rates would translate into a large one when it comes to the material costs involved.

“This will put pressure on the cash flow resources of many landlords and will focus their minds on maximising rental flows and reduction in costs, such as insurance, repairs and agent’s fees,” he said.

Mr Breuer also said that investors should consider what a rate rise means for property prices, noting that the relationship between the two has often been an inverted one.

“There is not much you can do about this other than sell the property if you have the conviction to do so,” he said.

Speaking to nestegg earlier this year, WLTH cofounder Drew Haupt recommended first home buyers prepare for the inevitable by staying informed, educating themselves about how future rate rises might impact their budget and working around those possibilities.

“Rather than running for the hills when interest rates rise, it’s important that first home buyers do their due diligence and build confidence by staying informed, educating themselves about future rate rises, and creating a realistic budget,” he said.

About the author

Fergus is a journalist for Momentum Media's nestegg and Smart Property Investment. He likes to write about money, markets, how innovation is changing the financial landscape and how younger consumers can achieve their goals in unpredictable times.

About the author

Fergus is a journalist for Momentum Media's nestegg and Smart Property Investment. He likes to write about money, markets, how innovation is changing the financial landscape and how younger consumers can achieve their goals in unpredictable times.

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