Homeowners need to prepare for higher interest rates

Stronger economic growth and rising inflation have many economists forecasting the start of interest rate tightening, with two possible rate rises this year and more after that. 

Naturally, this will hurt Sydneysiders—who reside in Australia’s most expensive housing market—the most. According to new data from the Australian Bureau of Statistics (ABS), the average mortgage in NSW is $456,100. 

“That means even those with an average mortgage may need to find an extra $131 a month by year end (with repayments going from $2535 to $2666, assuming you're on a typical 4.5 per cent now),” said Nicole Pedersen-McKinnon, finance educator, commentator, and ASIC ambassador.

Victorians, who’ve also seen a significant jump in house prices, will have to cough up an additional $114 on the average $396,500 home loan. 

With the average mortgage loan about $40,000 less in Canberra ($355,900), the increase will be slightly lower at $103. 

“WA residents owe virtually the same amount so will also have to shovel that much more onto their loans each month, while the average home loan in Queensland sits at just $332,000, so residents would only be up for an additional $95 ($1940 from $1845),” Pedersen-McKinnon said.

Also read: Redraw Facility Explained With Tips to Lower Your Mortgage

To help them navigate the impending higher mortgage rates, Pedersen-McKinnon said mortgage holders need to be more responsible with their debt. “Don’t take on more debt than you can afford. You can find your safe borrowing ceiling by stress testing your repayments for interest rate rises for 3 percentage points.”

She also advised current homeowners not to treat their homes “like an ATM”.

“If you've long been a happy homeowner, realise that it is the greatest source of future financial security for you—or it is when it is paid off. Every time you dip into your loan for shiny, fast, fun stuff (I'm thinking cars and holidays in particular), you delay the sweet financial release of becoming mortgage-free. The only exception to simply saving might be for renovations or something that would add to your property value.”

Lastly, Pedersen-McKinnon advised homeowners to consider refinancing this year. “The potential savings in 2018 alone are massive. While the average big bank advertised rate is 5.23 per cent, the best rate is way down at 3.39 per cent,” she said. 

Also read: Mortgage refinance guide