Kristy Sheppard from Australia’s largest independently-owned mortgage broker, Mortgage Choice urges borrowers to prepare now to cope with inevitable interest rate rises.
With much talk around further interest rate rises, every Australian with a variable rate home loan should reassess their budget as soon as possible.
The Reserve Bank of Australia’s first official rate increase in 19 months is a welcome sign of our economy’s health. However, now that lenders have followed suit and increased their mortgage interest rates, it will undoubtedly be a burden on many Australian borrowers, as will future increases.
It is always a clever strategy to repay your mortgage as if the interest rate was at least one to two percent higher. This prepares you for rate rises if they do happen and in the meantime helps you build a financial buffer, saving you total interest owed and time off your loan term.
Borrowers should also take ownership over their mortgage situation and also watch for indications of when their lender will increase its mortgage rates. A good way to monitor this is to read the finance section of newspapers, peruse online mortgage industry news, listen to and watch broadcast news breaks and take note of articles or online blogs featuring economists and market commentators.
If you’re unsure about your ability to repay your loan at a higher rate, revisit your budget now to see if there is a way to make further savings. Perhaps you can start making meals more often, cutting back on taking taxis, or limiting the purchase of treats like magazines, chips and soft drinks. Then, if needed, consider other options to help you manage your financial commitment such as reconsidering your loan term, making lump sum contributions or refinancing to different loan option.
Mortgage Choice suggests the following top tips to help borrowers battle rising interest rates:
- Give yourself a home loan health check. Consult a reputable mortgage broker to compare your loan options and help you determine if a different loan is more suitable, or ‘cheaper’. It may be that another loan offers you a lower interest rate and/or fees. However, a more affordable loan may have fewer features, so carefully weigh up the emotional and financial pros and cons of all options.
- Reduce the loan amount in one quick move. For example, making a lump sum payment now can knock time off your loan term and reduce your overall interest payments.
- Recalculate to lower your repayments. If additional money is sitting in your loan account, consider having your lender recalculate your ‘true’ loan amount using the extra funds, which changes the it to reflect what you actually owe. This, in turn, decreases your repayment level. Of course, it also means this money is no longer available to redraw.
- A fixed rate may help. If peace of mind over your repayment level is paramount, consider fixing all or part of your loan. However, keep in mind many lenders have already increased their fixed interest rates to levels that are significantly higher than most variable rates, and with the fixed element often comes fewer loan features.
- Reorganise your repayment strategy. If you are juggling the repayments of multiple loans or credit debt, consider rolling them all into one. Stretching these repayments over the life of your mortgage will reduce your overall monthly repayments but will see you paying more interest over the long run because you’ve lengthened each debt’s loan term. So, this strategy alone will not help you reduce your debt faster but it may help you cope better.
- Extend your loan term. Although not an ideal option, extending your home loan term will stretch the loan amount owed over a longer period of time, thereby reducing the amount of your regular repayments. However, you need to remember that for every extra month you have a home loan, that loan will attract interest.
About Kristy Sheppard
Kristy has over 11 years experience in public relations, covering both corporate and consulting roles across a wide range of industries. She joined Mortgage Choice in July 2004 and was appointed Senior Corporate Affairs Manager in September 2008. As head of the department, Kristy is responsible for the national publicly-listed company’s media, corporate, industry, government and investor communications. She also acts on a daily basis as the Mortgage Choice spokesperson, having made many appearances on television and radio, and within a multitude of print and online media articles.
For more information about Mortgage Choice visit www.mortgagechoice.com.au or www.facebook.com/MortgageChoice or http://twitter.com/MortgageChoice.