Our Chief Economist's insights on rate rises and how to prepare
The Reserve Bank of Australia (RBA) has increased its cash rate, which will likely continue to rise over the next couple of years. In this article, we'll explain why this is happening, how high rates could go, and offer tips to ensure your financial goals are still being met.
Why are interest rates rising?
Prior to the announcement on the 3rd May, the RBA hadn’t increased rates since 2010, and in this time, interest dropped to historic lows. And while an increase has been projected and discussed for some time, it’s still important to understand the underlying cause of why this happens.
‘The unemployment rate is at 4%, the lowest level since 2008, and inflation is too high at 5%, the highest rate since the GST was introduced in 2001,’ says BOQ Chief Economist Peter Munckton.
Without the increase, inflation would be too high — so curbing spending through rate rises is the action the RBA takes during times like these. Conversely, when the economy needs stimulating, the RBA will lower interest rates, which is what we have seen in recent years.
Now that the rates have been initially increased, we can expect several further increases. ‘Most economists expect the cash rate to reach at least 1.5%, with most of that move happening by the end of this year,’ says Peter.
How those with a mortgage can prepare
The good news is that there are multiple ways to prepare for a higher rate environment and to keep your financial goals on track:
- Look at fixing your loan to know the exact figure you’ll be paying today and into the future (be sure to plan for higher rate rises towards the end of the fixed period).
- Establish a household budget or re-evaluate your current one.
- Make repayments when and if you can to lower the duration of your loan.
- Explore offset accounts to lower your interest and still have available funds.
- Look into splitting your loan if you want the benefits of offset and fixed accounts.
- Ensure your loan is competitive (there’s no point spending more than you have to!).
Know your numbers
BOQ has several home loan calculators available. These will help you find the figures of what increased rates could cost, the benefits of extra repayments, or even how splitting your loan can help. Crunching these numbers is the best way to come up with a budget that works for you. And if you want to fine-tune your budget further, check out our budget planner.
We’re here to help, so please discuss any concerns with your local branch or broker. Our customer support team are also available if you need support.
