BORROWERS have been urged to consider fixing their home loan and ramping up extra repayments in preparation for a possible interest rate hike.
It follows speculation, including from the Prime Minister, that rates could rise amid warnings from the Reserve Bank.
Minutes from the RBA’s July meeting revealed last week that members estimated Australia’s “neutral real interest rate” — where output growth is at potential and inflation stable — was 3.5 per cent.
Experts interpreted the release of this figure as a warning to highly leveraged property investors, to ensure they could afford to meet higher mortgage rates.
Prime Minister Malcolm Turnbull echoed this advice at the Melbourne Institute economic outlook conference on Thursday, saying:
“Rates are more likely to go up than down”.
ME head of home loans Patrick Nolan said the neutral rate was 200 basis points, or “eight typical rate hikes”, above the current 1.5 per cent cash rate.
“A 3.5 per cent increase would take the average mortgage from 5.3 per cent to well over 7 per cent, adding $520 per month to an average $400,000 loan,” he said.
Mr Nolan said borrowers needed to prepare themselves for possible hikes.
“Ask yourself how any rate rises would impact your money goals, such as renovations and holidays,” he said. “Online calculators can help you crunch the numbers.”
Mr Nolan said borrowers should also check their home loan was competitive and consider fixing their rates.
“Look for a fixed loan that allows extra repayments so you can whittle down the balance sooner,” he said.
He said borrowers should also ramp up extra repayments now, while rates were still at record lows, and scale back other debt, perhaps by switching to a cheaper credit card.
CoreLogic head of research Tim Lawless said he didn’t expect the cash rate to change this year — “particularly when the banks are doing all the heavy lifting pushing mortgage rates higher”. But he predicted mortgage rates to edge higher for investors and interest-only loans.