On Tuesday, the Reserve Bank of Australia cut the cash rate by .25 percent down to a record low of 2 percent. Economists believe that this was the last in the current cycle of cuts, however they are tipping that the cash rate may not rise for up to three years.
"The growth and inflation outlook suggests the RBA sees no threat of a rate hike until at least 2018," Macquarie Research analysts said.
Economists expect the RBA to wait to see if the predictions of ongoing weak wages growth and an increase in consumer spending are accurate before they make any changes to the cash rate.
Justin Fabo, ANZ senior economist, believes there will not be any rate rise for at least the next 18 months. He predicts that rates will remain on hold until 2017 and then the RBA may begin to increase rates again.
While some experts believe a rate cut won't occur for the next few years, 68% of experts surveyed in the finder.com.au Reserve Bank Survey forecast interest rates to start rising from as early as February next year.
Michelle Hutchison, Money Expert at finder.com.au, said borrowers need to start preparing for rate hikes now.
"The Survey shows the cash rate is expected to rise to 4 percent, which means variable home loan interest rates will hit an average peak of 7.10 percent. For an average $300,000 home loan, that's an extra $341 in repayments per month," she said.
If these predictions are correct, what can you do to put yourself in the best financial position if the interest rates do rise in the next three years?
Pay more than the minimum
With interest rates falling you could have reduced your repayments by quite a bit if you just pay the minimum. Why not set your repayments to what they were prior to the rate cut and pay off more of the principal. This way, you are still making the same repayments prior to the rate cut, but you are just paying off your home loan sooner.
It is also a great idea to make larger repayments now so that if interest rates do begin to increase, you will have a buffer already built in if you need extra funds to help meet the repayments down the track.
Put savings into your offset account
The lower interest rates may mean that you are not seeing as big of a return from your savings account. So, why not consider putting your savings in a home loan offset account. Instead of earning interest at deposit account rates, you will be saving interest on your home loan at your current home loan interest rate. Better still as it is a saving in interest, it is not taxed like interest on savings accounts. An offset account is great place to deposit your savings. As it is a separate account to your loan, you will have clear visibility of what you have saved and transactions in the account.
State Custodians has passed on the rate cut in full to their customers and offers some of the most competitive home loan products on the market. If you are in the market for a home loan give our Lending Specialist team a call on 13 72 62 or leave your details here and they will give you a call.