How to prepare for an interest rate rise

Interest rates are expected to increase over the next two years and it’s a good idea to plan ahead. Check out our tips on what you can be doing to prepare.

Aussie borrowers have had it very good for quite some time when it comes to interest rates. The official cash rate has been sitting at 0.1% since November 2020. Since 2011, any movement has been downwards. In fact, the last time the cash rate increased was in November 2010. It’s estimated that more than one million home borrowers around the country have never experienced an increase in mortgage rates.

But this will not last forever. Many experts are now saying there could be a cash rate increase when the RBA’s board meets next on 3 May 2022. It’s not expected to end there either, with further increases possible. Major bank NAB is predicting rate increases in May, June, July, August and November of 2022, while ANZ is forecasting the cash rate to reach 2% in the first half of 2023.

Of course, these are just forecasts and are not set in stone, but it can pay to start planning ahead. Here are five things you should consider doing now to prepare for the inevitable interest rate hikes.

1. Calculate how a rate increase could impact your home loan
2. Look for ways to cut costs
3. Build a buffer
4. Consider fixing your mortgage
5. Shop around for a better deal

1. Calculate how a rate increase could impact your home loan

It’s a good idea to work out how much higher your repayments are likely to be when rates rise. To give you an idea, Canstar’s calculations show that a 0.25 percentage point (pp) rate increase on a $500,000 mortgage could cost you an extra $68 a month, while a 1 pp increase could see you paying an extra $278 a month (see table).

Impact of rate increases on monthly repayment

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Source: Canstar’s mortgage calculator as at 29/04/2022. Average variable rate based on owner-occupier variable loans on Canstar’s database, available for a loan amount of $500,000, at 80% LVR with principal & interest repayments. Monthly repayment calculations exclude fees and assume principal and interest repayments on a $500,000 loan made over a total loan term of 30 years.

You can use Canstar’s mortgage calculator to crunch the numbers for yourself based on your loan amount and interest rate. This will give you an idea of what impact various rate rises could have on your repayments and whether you need to make any tweaks to the family budget.

2. Look for ways to cut costs

Now is a great time to start looking at the family budget and look for ways you may be able to save money. Can you reduce the amount you spend on groceries and takeaway? Can you find a better deal on your car insurance and home insurance? Is there a cheaper energy provider you can consider? Can you pay less for your internet and mobile plan? Go through your budget with a fine-tooth comb and identify how you may be able to cut costs. You can use the extra money you save to start building a buffer on your mortgage (see next point).

→ Related: 70 tips to help you start saving money 

3. Build a buffer

It’s a good idea to make extra repayments towards your mortgage – especially now that rates are still quite low – to build a buffer. It’s up to you to work out how much extra money you want to add, but one option is to calculate what your repayments would be if your rate increased by 1 percentage point and start paying that amount if you can.

You can put this money straight into your mortgage and if you have a redraw facility you may still be able to access the money if you need it. Just make sure you find out about any fees or if there is a minimum redraw amount. Or, you could use an offset account if there is one linked to your mortgage.

Essentially, you will be ahead on your repayments which may help you if rates rise. Another advantage of making extra repayments into your mortgage is that you will save on interest in the long run.

→ Related: What’s the difference between redraw and offset?

4. Consider fixing your mortgage

If you are concerned about how you would manage if rates increased, you may want to look into locking in a fixed rate for all or part of your mortgage to give you that extra bit of security. Fixed rates have already started moving up but it is still possible to get a good rate. The lowest three-year fixed rate on Canstar’s database is 2.79% and the average is 3.96%. If you are looking at locking away for longer, the lowest five-year fixed rate on Canstar’s database is 2.84% and the average is around 4.50%.

To give you an idea of how this compares with variable rates – the average standard variable rate of the loans on Canstar’s database is 3.23% while the lowest is 1.79%.

If you are considering fixing, make sure you find out whether any fees apply and whether you can still make additional payments. With rates changing fast at the moment, and generally going up, you could consider using a rate lock, which ensures (for a fee) that your fixed loan rate won’t increase between the time you apply for the loan and when it settles.

5. Shop around for a better deal

Something else you may want to consider is looking for a better deal and switching lenders. New customers often get a lower interest rate than existing customers. As the table below based on recent data shows, for example, there is a difference of 0.41% percentage points between the average rates for new versus existing customers, which equates to a $108 difference in monthly repayments on a $500,000 loan.

Average rates for new vs existing customers

Source: RBA Housing Lending Rates. Prepared by Canstar on 22/02/2022. ^Based on owner-occupied loans written in the 12 months to Dec 2021. *Based on the 12-month average of outstanding owner-occupied loans to Dec 2021. Monthly repayment calculations assume principal and interest repayments on a $500,000 loan made over a total loan term of 30 years.

If you are planning on refinancing, it can be a good idea to calculate your break-even point.  To do this add up any costs of refinancing and divide that figure by the monthly savings you would make on repayments. For example, if it costs you $1,000 to switch to a new lender, but you expect to save $50 per month in repayments, it would take 20 months to break even.

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