I’m a first home buyer and would like to know how to plan ahead for rate increases. Is there a way to calculate or budget to make sure I can still make the repayments?
Nikki. Hi. A good question that is very sensible to be asking.
When A Lender considers your loan application, they will build in a number of buffers in regard to your affordability. The first thing that they do is consider that interest rates may rise. Most banks will assess your affordability at a "stress" rate of between 7.25% and 8.00%. With actual rates on offer at around ( or below) 4.00% , this is a very big buffer.
Further buffers can also be applied if you are relying on overtime or allowances as part of your income.
In short, if you calculate your personal expenses carefully and can pass the Lenders calculation, you should be OK.
As part of my Broking service, I would be happy to model some scenarios to fit your personal circumstance.
Please give me a call if you would like to chat further.
Customers First Mortgages & Insurance
1300 ASK KEN
We have a calculator that can be used to model the future impact of rate rises. You can also use a basic repayment calculator such as
And simply model the impact of your monthly payment by putting everything in then comparing a new loan with a potential rate
We can also help you model the impact of fixing vs not, but don't have a customer facing calculator that yet!
There's a few ways to solve for this. The first step is to work out how much your repayments will go up if your interest rates increase. You can do this by using a repayments calculator (use a 30 year loan as that is probably what you are on) to calculate what your loan repayments will be each month. You can change the interest rate to see how much your repayments will go up to if there is an interest rate increase. Here's a calculator on our website that you can use:
(you can put in one interest rate on the left, and a different rate on the right to compare two loans)
Next, you can put together a monthly budget to work out how much you're spending each month. If you co back through your credit card statements or your bank statements, you can normally get a pretty good idea of what you're spending money on.
Here's our budget calculator that you can fill in to help you with that:
Finally, if you're worried about increasing interest rates, you might want to consider getting or switching to a fixed rate loan - they can help you sleep at night by locking in the rate for a 1-5 year period.
I'm not sure if you have a loan already or not, but if you'd like us to help you with all of the above, we'd be happy to. You can our request details here or start at live chat with me now at www.mortgagedirect.com.au.
The best way is to be comfortable repaying around 2 - 2.5% above the current rate,
This way you can make sure that if the rate goes up you are still able to pay,
Additionally, you can take some fixed rates to insure against rate rises in the short term 1 - 5 years.
hope that helps,
0414 545 643
All of the answers given are correct in that the banks assess your ability to pay the amount required by rates being between 7.25% and 8.00% depending on the lender before approving your loan.
It can be very easy though to spend all of your money each month and then get a shock when rates rise and you have to pay a higher amount.
What I believe you need to plan for is building a buffer in an offset account or in redraw that equates to around 6 months of repayments that will make sure you are ahead on your loan through the interest rate cycle and give you comfort that you can handle other financial surprises in your life.
To build this buffer, I would pay around 5% more each fortnight or month than what you have to pay off the loan and pay another 5% into the offset account as well. If you pay these amounts from the very start of your loan you won't miss the money and you will be able to budget effectively
Best of luck