Can you cope with 2% higher interest rates?

It’s time to pull out your calculator and do some simple sums on those mortgages. And the sum to do is to take your current interest rate, add 2%, and see if you can cope with the adjusted repayment amount. Because that’s where we are headed.

There is now no doubt that the RBA is done with its rate lowering cycle. We’ve all been hypothesising on this for a while, and the RBA itself has now essentially confirmed it.

In fact, Glenn Stevens has gone further, and indicated that rates need to go back to “normal” levels, which he defined as “a good deal north of where the cash rate is now”.

Reading between the lines, I think the RBA is indicating that 5% is more normal to it. That’s a 2% rise from here. And given that we’ve all got used to “unusually low” rates (as Glenn Stevens refers to the current state of play), that will feel like a large rise.

This prediction may be unsettling for first home-buyers or those looking to refinance – for a typical loan of $250,000, this 2% hike will mean an extra $300 in monthly repayments. Use the Mozo Home Loan Health Check to see if your loan is costing you more than it should.

So the only question now is WHEN rates will start to move up…
My prediction is that it isn’t when the RBA next moves on rates that we need to worry about, it’s when the banks do, because I think they’ll be first. Regardless of when the RBA decides it’s time, I’ll place a $20 bet that the banks move before it does anyway.

And it may be sooner than we think. No bank will want to be first, but one of them will go at some stage, and as soon as that happens, the one thing you can be completely sure of is that the rest will follow quickly. They act in unison – always have, always will.

So just when we least expect it, at a time when the news flow will allow it to get through without too much push back, one bank will move rates up, and the rest will follow.

Given all that, and a world where rates are about to start moving in a one way journey north, it’s a good time to do some quick sums and make sure you can cope with an extra 2% on your mortgage.

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Can you cope with 2% higher interest rates? was last modified: June 13, 2012 by Rohan Gamble

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