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The RBA has been playing a waiting game for a long time now - no rate changes at all since August 2016 and no rate rises in more than seven years.

We've all gotten used to the current record low rates, but it's a situation that can't last forever, and it seems the Reserve Bank may finally be ready to start lifting rates in 2018.

Mid last year the RBA said that it considers the 'new normal' cash rate to be around 3.50%, which is eight typical rate rises above the 1.50% cash rate that we've been on for the last 18 months. With the Reserve Bank keen to at least start the process of pushing the cash rate towards this new normal, it’s likely we’ll see a rate hike in the next 12 months.

Heading in to 2018, all eyes will be on key consumer indicators such as wages, employment numbers and consumer confidence levels. If these are moving in the right direction and inflation starts to build, I expect the RBA will be on the lookout for the chance to lift interest rates.

Having said that, the Reserve Bank is never in a rush to make big decisions, and will almost certainly stick to its policy of prudence and caution to avoid straining household budgets, which are already feeling the impact of high levels of debt and mortgage stress.

Although the coming year could still go either way, with businesses fairly optimistic but leading indicators softening, I would not surprised to see a rate rise or even two - so it pays to be prepared for the impact that might have on your household budget. 

How to prepare for an interest rate rise

Plump up your savings account

Interest rates on savings accounts have been dismally low for some time now, but with an RBA rate rise on the horizon, there’s also a possibility banks will start nudging savings account rates up for customers as well. To make the most of it, I’d suggest putting any extra cash you can into your rainy day fund - it may not make a huge difference, but every little bit counts!

Tighten your budget

The main thing that may worry some Aussies is that with an RBA rate increase, usually comes higher variable rate home loan repayments. For example, on a $400,000 loan over 25 years, a rate rise from 4.00% to 4.25% could mean an extra $56 a month in interest, or $672 over a year.

While it’s not certain banks will raise rates in line with the RBA, it would surprise no-one if they did - so borrowers should be ready to foot the extra cost in the coming years.

Review your home loan

If the RBA hikes rates in 2018 and your lender follows suit, it’s important to review your home loan and check if you’re still getting a competitive deal. If not, you can call your lender and see if you can negotiate yourself a better interest rate, or maybe a waived service fee, or consider biting the bullet and refinancing with a better value offer. A good place to start looking is with Mozo’s Home Loan Experts Choice Award winners.

Picture of Peter Marshall wearing a red and blue check shirt. Manager of Data Team at website Mozo

Author bio: 

After starting his career working for the banks, Peter Marshall has spent the last 15 years helping consumers compare financial products. At mozo.com.au he manages the Data Team which keeps track of banking, insurance and energy products in Australia.

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