Ready for lift-off: how to prepare a buffer for more rate rises

RATE RISES ARE A BIT LIKE TAKING OFF IN A PLANE. SURE, IT’S A BIT NERVY, BUT SO LONG AS YOU’VE RUN THROUGH YOUR PRE-FLIGHT CHECK, HAVE A WELL-SERVICED AIRCRAFT, BUILT-IN SOME CONTINGENCIES (A BUFFER!), AND HAVE A HANDY CO-PILOT (US!), YOU SHOULD REACH YOUR DESTINATION NO WORRIES.

AS YOU’RE LIKELY AWARE, EARLIER THIS MONTH THE RESERVE BANK OF AUSTRALIA (RBA) INCREASED THE OFFICIAL CASH RATE BY 25 BASIS POINTS TO 0.35% DUE TO HIGH INFLATION CONCERNS.

While it was the first cash rate hike since November 2010, RBA Governor Philip Lowe was quick to give mortgage holders a heads-up that there would be more hikes to come.

“The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time. This will require a further lift in interest rates over the period ahead,” Governor Lowe said.

So when can we expect more rate increases?

Well, the Commonwealth Bank is predicting that the RBA will increase the cash rate to 1.35% by the end of the year.

That could mean four more 25 basis points increases, with hikes in June, July, August and November 2022.

Fortunately, according to results from a recent Money Matchmaker survey, eight in 10 borrowers have built up a savings buffer and nearly two-thirds are ready to meet a 0.5% rate rise or more.

This echoes research from the Australian Prudential Regulation Authority (APRA), which shows the average balance sitting in mortgage offset accounts is now nearly $100,000 – up almost $20,000 since the pandemic kicked off in March 2020.

How your handy co-pilot can help you set up a buffer account

As we’ve seen from this month’s RBA cash rate rise, the banks are quick to pass on rate hikes when it comes to mortgages, but not so quick when it comes to savings accounts.

Therefore one way you can prepare for this upcoming period is to consider adding an offset account to your home loan.

In a nutshell, an offset account is a regular transaction account that is linked to your home loan.

The advantage is that you only pay interest on the difference between the money in the account and your mortgage.

Some banks allow you to have 10 offset accounts attached to your mortgage, too, with cards linked to them that you can use for everyday spending.

This means that if your lender is quicker to pass on rate rises on your home loan than they are your savings account, your money will be working harder for you in the offset account than a savings account.

And, by building up extra funds in your offset account, you will also have peace of mind knowing that you have a buffer – in the right place and ready to go – for more interest rate rises down the track.

So if you’d like to talk to us about your options to prepare for any upcoming rate rises – be that refinancing, fixing your rate, or adding an offset account – get in touch with us today.