The big financial news for October, and more importantly the good news for mortgage borrowers, was the Reserve Bank’s decision to keep the cash rate unchanged.
“This was undoubtedly a surprise to the market,” says Scott McWilliam, Homeloans’ general manager of funding and operations.
The expectation of interest rates going up was so great that, in the hours leading up to the RBA decision, the Futures market was pricing a 75% chance of a 25 basis point rate hike.
However, just because the RBA elected not to increase the cash rate in October doesn’t mean that it will do the same later in the year.
“It's a matter of waiting to see what happens to the economic data over the next few weeks and months, which will determine if the RBA deems it necessary to lift interest rates,” McWilliam says.
So, what should we be doing in the meantime?
McWilliam recommends that, regardless of the rate cycle that the economy is in, borrowers should always look at ways to pay down debt – especially non-tax deductible interest debt, such as owner occupied mortgages.
“It makes sense to start preparing now for the possibility of tougher times ahead,” he says.
“If you think you might have difficulty making your budget stretch to cover increases in your mortgage repayments, there are options available which may help improve your financial situation.”
Below are just a few examples that may be worth considering, however it is important to seek professional advice when it comes to such decisions:
1. Convert your repayments from ‘principle and interest’ to ‘interest only’ for a brief period. We would not recommend doing this during more financially comfortable times, as paying down principle is the only way to reduce your mortgage debt. But if you think that you will struggle to meet your commitments with one or two interest rate increases, then making interest only repayments could be a good short-term option;
2. Fix the interest rate for all or part of your loan. Most lenders offer fixed rates and many also give you the option of fixing just a portion of your loan, rather than the whole amount. Fixing only part of your mortgage is quite popular, as you receive the benefit of repayment certainty on the fixed portion of your loan while also enjoying the variable rate discount on the other portion.
3. Another option, which requires discipline, is to assume that you are paying a higher interest rate now, before rates actually rise. This has two main benefits. Firstly, you get in the habit of tightening your budget to make the larger mortgage repayments, which means that you will be prepared if rates actually do rise. And secondly, you will end up paying off more of the principal on your loan in the interim.
There are many more options available to most borrowers who are finding it difficult to meet their mortgage repayments. As always, Homeloans recommends that borrowers speak to their financial advisor, broker or lender before making decisions regarding their finances.