To understand rising interest rates, we have to go back to the Reserve Bank of Australia as our foundation.
The RBA sets what is called a “cash rate.”
This rate is what they charge banks for borrowing money or what commercial institutions charge each other when they borrow money. Meetings are held on the first Tuesday of each month (except January) to discuss cash rates; the cash rate is always increased by 25 basis points.
Currently, the cash rate in Australia is sitting at 2.85%, the highest it has been in over 10 years.
The RBA manages the cash rate based on a number of factors: consumer confidence, business confidence, the performance of the Australian dollar, the international economy, employment, and inflation, among others. The RBA aims to ensure the stability of the Australian economy.
So how does this affect your mortgage repayment or your borrowing as an average citizen? Keep reading.
When the RBA sets the cash rate, financial institutions will then charge you an interest rate for borrowing money from them, whether as a homebuyer or as a borrower to meet a financial need.
If the RBA increases the cash rate, some financial institutions may choose to pass on this increase to you via an increased interest rate. This means that when the cash rate is high, interest rates rise and borrowing is constrained because mortgage repayments are heavy.
High-interest rates are good for lenders and savers but not for borrowers. Conversely, when cash rates are low, interest rates are low as well, so borrowers are better placed to service their loans.
How, then, do we manage a high cash and interest rate situation as a borrower? We’ll give you a few tips.
Simple ways to save towards your mortgage repayments
One simple way to save would be to reevaluate your grocery spending. Food is a basic need that we cannot completely cut out. Instead, we can work around cutting back on this expense.
As an example, the Anaconda catalogue carries several special deals that can help with making grocery lists and determining what amounts will be spent on them, as well as choosing brands that are more favorably priced for your must-have items.
Another simple way would be to manage your spending on takeout, as well as your subscriptions to sites or apps that may be pinching your money. Small, seemingly insignificant amounts go a long way toward saving in the long term.
There are other, more technical ways of managing your mortgage. Let’s get into them.
Establish what kind of mortgage plan you are on
There are two main types: fixed-rate mortgages and variable-rate mortgages.
Others are a hybrid of these two. When you are informed about the kind of plan you are on, it makes it easier to manage your home loan repayments, as some can be adjusted to the prevailing economic conditions.
Your broker or banker will be best placed to advise you correctly and make the necessary adjustments if need be.
This will greatly aid in money management.
Overpay your mortgage
If you can, pay more than what is due when the interest rates are low, before the cash rate increases. This will give you wiggle room when turbulent times hit, so you can focus your finances elsewhere until you can recover.
Figure out what you can afford
Sit down and work out your finances so that you have a clear picture of what you can afford. If it will be too expensive, you will then work from there to either cut back on other expenses or refinance, depending on what type of mortgage plan you have.
When you know where you stand, it’ll be easier to make an informed decision.
Ensure you’re on the best plan
When you are sure of which plan you’re on, ensure that it is the best one for your pocket and your future. When discussing whether the plan you’re on is the best one for you given your earning and spending profile with your broker, be prepared with enough inquiries and information.
You can make use of the many tools available online that calculate mortgage repayments.
While changing cash and interest rates can be a bit daunting, it is best to keep abreast of these changes as they directly affect our pockets. The more you know, the easier it’ll be to adjust to any changes that come.