If you’re a homeowner, then you’re likely aware of the impact of the cash rate on your mortgage. The Reserve Bank of Australia sets the cash rate, which influences the interest rates offered by banks and lenders. When the cash rate increases, so does the interest rate on your mortgage, resulting in higher repayments. On the other hand, a decrease in the cash rate will lead to lower interest rates and repayments.
While the cash rate can have a significant impact on your mortgage, there are also risks associated with a fluctuating cash rate that you need to be aware of. Here are some of the risks your mortgage might face:
- Interest rate increases: As mentioned earlier, when the cash rate increases, the interest rate on your mortgage will also increase. This means that your repayments will increase, putting a strain on your finances.
- Budgeting difficulties: Fluctuations in the cash rate can make it challenging to budget for your mortgage repayments. An increase in the interest rate might mean you need to cut back on other expenses to make your mortgage repayments.
- Negative equity: If the value of your property decreases, and you owe more on your mortgage than the property is worth, you could be in negative equity. This can make it difficult to sell your property or refinance your mortgage.
So, how can you deal with these risks? Here are some tips:
- Plan ahead: Consider the potential impact of interest rate changes on your budget and plan accordingly. If interest rates were to rise, would you still be able to afford your mortgage repayments?
- Consider a fixed-rate mortgage: A fixed-rate mortgage can provide some stability by locking in your interest rate for a set period. This can make budgeting for your mortgage repayments easier.
- Make additional repayments: If you have extra funds available, consider making additional repayments on your mortgage. This can help reduce your overall mortgage balance and decrease the impact of interest rate increases.
- Keep an eye on your property’s value: Stay informed about the value of your property and any changes in the local property market. If you’re concerned about negative equity, consider getting a property valuation.
While the cash rate can impact your mortgage, it’s important to be aware of the risks associated with a fluctuating cash rate. By planning ahead, considering a fixed-rate mortgage, making additional repayments, and keeping an eye on your property’s value, you can reduce the impact of these risks on your mortgage.