Owning a home is still the Australian dream, but it doesn't come cheap. In fact, according to the Australian Bureau of Statistics we as a nation owed almost $34 billion in home loans as of December 2016.
That's why changes in interest rates and the official cash rate matter so much. Because a 1 per cent increase could cost Australians as much as $340 million more in repayments a year. With an eye to helping you keep your mortgage costs down, let's have a look at what's happening with interest rates.
Interest rates likely to increase
On August 3 last year the Reserve Bank dropped the official cash rate (OCR) by 0.25 to 1.5 per cent - the lowest it's ever been. This comes after continued falls in the OCR, savings which lenders passed on to consumer borrowers, offering record low interest rates.
The winds of change are blowing now though, and the OCR may be on it's way up soon. The OECD's November Economic report suggests it could start increasing by the end of this year, and other industry commentators think it may occur even sooner.
Here's what it means for your home loan
Generally when the OCR climbs, consumer interest rates do too - but what exactly does this mean for your home loan? Assuming your entire mortgage is on a variable rate, as the OCR climbs your mortgage repayments will be larger.
A one percent rate increase will mean the annual interest repayments on the average Australian home loan ($367,000, according to the Reserve Bank) increase by almost $4,000. Over a 30 year loan term that's over $100,000!
Here's what you can do about it
The most effective safeguard against increasing market interest rates is a well structured home loan.
The most effective safeguard against increasing market interest rates is a well structured home loan. First of all, at least part of your loan should generally be fixed, ensuring that you lock in low interest rates before they start increasing.
Secondly, it's often prudent to split your home loan so that it's part variable and part fixed interest. That way you can hedge your bets on the market, you'll be able to make extra repayments without being charged, and your entire loan wont be maturing at the same time.
Get in touch with Yellow Brick Road today and we can walk you through the entire process. Our experienced and knowledgeable financial advisors will get to know you and your situation and advise you on the perfect home loan for you.