How will repayments change if rates move?

Why do rates changes?

The most common reason loan interest rates change is because the Reserve Bank of Australia (RBA) will change the official cash rate. The RBA meets each month to review the cash rate and its influencing factors (such as the economy), and make a decision to either increase, decrease, or hold the cash rate.

The cash rate is the market standard for interest rate on loans. So, the lower the cash rate, the lower interest rates financial institutions will have on their financial products, such as home loans, personal loans, savings accounts and term deposits. This also impacts the lenders cost of funding.

However, lenders can increase or decrease their interest rates outside of any RBA cash rate movements. This may occur if a lender obtains funding through difference sources, and funding costs change, for example the bank bill swap rate.

The end of a fixed rate term can also be a reason your interest rate changes. Once your fixed term ends, your mortgage will revert to a variable rate. Variable rates are susceptible to change, so it can go up and down depending on the cash rate set by the RBA and your lenders cost of funds. 

What can I do to prepare myself for movement?

A high interest rate will result in increased loan repayments, and this can result in less disposable income. Here are some useful tips you can use to prepare for any potential rate changes. 

Find a repayment that is comfortable to you

Figure your home loan repayment budget by using our home loan repayment calculator. You can input the interest rate on your loan, loan amount, and repayment frequency according to your personal situation. Finding your approximate repayment amount can help you determine how to build a buffer for any rate increase that may affect you in the future. Experts have mentioned that the current cash rate of 0.10% is looking to increase quite a bit over the coming years.

Consider a fixed rate home loan

A fixed rate home loan will have a ‘locked in’ interest rate for a period of time, usually between 1 to 5 years. That means your interest rate won’t change if the RBA cash rate increases or decreases, and your mortgage repayments will remain the same during the fixed rate period.

Refinance to a lower rate

Refinancing to a lender who can offer you a lower rate can help to reduce your monthly payments. This may also allow you to increase the equity in your property if your property value has increased, as a new lender will require you to obtain a new valuation. This can result in a better deal on your home loan and can save you even more money. You can use our refinance calculator to find if you are getting a better deal compared to your current loan.

What is better, variable or fixed?

Key benefits of variable rate

A variable rate has more flexibility since it comes with more flexible repayment options. This includes having a redraw facility or an offset sub-account which can help you reduce the amount of interest being charged on your loan.

A variable rate home loan typically provides the option to make free additional loan repayments. Doing so can reduce the length of your home loan term and reduce the overall amount of interest you will need to pay.

Since your interest rate is not locked in, it is possible that your rate will decrease if the cash rate drops, which would result in lower mortgage repayments.

Key benefits of fixed rate

One of the benefits of a fixed rate home loan is the certainty of your repayments. Your interest rate is locked in, so you will not be affected by any changes in the RBA cash rate, regardless if it increases or decreases.

A fixed rate is a great option first time home buyers who are still adapting their budgets accomodate for home loan repayments. 

It iss possible to split your loan if you cannot decide between a variable or a fixed rate. You can split your loan between 50:50, 60:40 or any other ratio that is suitable to you. You can ask your lending specialist about your options. 

When to seek professional advice?

All of us have a unique financial situation, so it’s always best to seek professional advice that is tailored to you. Many lenders have lending specialists that can assist you with their financial products. 

Other tips?

Make additional repayments

 If you have extra money on hand, it can be a good idea to make extra repayments while things are affordable to weather future storms and pay off your loan sooner. 

Offset account

An offset account is generally available on variable loans. This is a transaction account that lets you make deposits and withdrawals and helps you save on interest. For instance, if you have a $500,000 home loan and $10,000 cash sitting in your offset account, your interest will only be calculated on the difference between these amounts - $490,000.

Loan term

Refinancing to a longer loan term can give you the benefit of reducing your mortgage repayments, however, this will result in a higher overall loan amount in the long run, because you will be paying interest on your loan for a longer time period.

Explore other repayment frequencies

To suit your pay schedule, it can be a good idea to try other repayment frequencies. Paying more on a regular basis, such as weekly or fortnightly is a good way to make extra repayments, shorten the time it takes to pay back your loan, and save in interest.

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