There is no way to accurately predict when interest rates will rise again but there are ways to prepare yourself in advance.
The important question here is; how can you lessen your financial burden during these rate rises?
Speak to a mortgage broker
If you are running your finances to the wire just to keep up with mortgage repayments, it may be that you need a home loan health check from a mortgage broker.
- Assess your situation in full: By running through simple calculations about where you stand if interest rates were to rise, they can help you find a solution that will put you in a better financial position.
- Help you refinance: One option may be to refinance your home loan and switch to a lender that will offer you a sharper interest rate.
- Negotiate with the banks on your behalf: Mortgage brokers have strong relationships with major banks and lenders so they can access heavily-discounted rates.
Give us a call on 1300 889 743 or fill in our free assessment form and one of our expert mortgage brokers will help you make a plan to prepare for an interest rate rise.
Find out if you’re eligible to refinance
- You owe less than 80% of the property value on your mortgage.
- You are on a variable rate: You should consider refinancing every 6-12 months but just keep in mind that you’ll add an enquiry to your credit file every time you refinance.
- You are no longer on a fixed rate term: Despite the break costs and early exit fees, it sometimes makes sense financially to refinance within the fixed period, especially if you recoup these costs within 2 years of refinancing.
You should consider refinancing if:
Try our refinance calculator to work out how much you’ll actually save by refinancing.
In this way, you can determine whether this is the best option for you to prepare for an interest rate rise.
Switch from variable to a fixed rate
The idea of switching to a fixed rate is to lock in the good times for anywhere between 2-3 years.
It gives you certainty over your repayments and peace of mind if you have other expenses to deal with.
The drawback is that it limits your ability to make extra repayments and the lender will charge you if you decide later to refinance within the fixed period.
You should speak to a mortgage broker and discuss your long-term plans.
For example, you may be better off switching just a portion of your home loan so you have some flexibility and certainty.
Make extra repayments with an offset account
If you’re currently making minimum loan repayments, making extra repayments can help you minimise your loan and reduce the overall interest payable on your home loan.
Golden tip: Making extra repayments with an offset account gives you the best of both wolds.
A savings buffer that offsets your interest
If you make extra repayments to your offset facility, you can “offset” the interest on your home loan.
For example, if you have a mortgage balance of $600,000 and $15,000 in your offset account, you will only pay interest on $585,000.
So how much are you actually saving?
Well, if you were paying 4.50% per annum, you would save $40,856 over the life of the loan and shave 1 year and 1 month off your home loan.
Try the offset facility calculator for yourself to discover how much you could save.
If you haven’t done so already, a good strategy is to link your salary payments directly to your offset account.
In this way, your home loan repayments will be withdrawn automatically and everything left over will offset your interest.
It’s a clever way to give yourself a savings buffer to soften the blow of higher mortgage repayments.
Access the funds when you need them
Unlike a redraw facility, withdrawing from your offset account is free, other than your annual home loan package fee.
The other drawback on redraw is that this feature is sometimes not available on fixed-rate loans.
An offset account works very much like your everyday transaction account, unlike a redraw facility which requires you to transfer funds to your transaction account online or on your bank app.
Unsure what solution is right for you?
Call us on 1300 889 743 or complete our online enquiry form and we can discuss your home loan options and help you better manage your mortgage repayments.
Make a 3-6 month plan
Apart from focusing on your mortgage, there are actions you can take to put yourself in a better financial situation.
In this way you can better survive an interest rate rise.
Set a budget
If you can’t come up with the funds to make extra repayments, start budgeting.
It is a great way to work out where your income is being spent.
Cut unnecessary spending
It is always a good idea to track your income and expenses to get an idea of what you can do to save money.
You should also assess your monthly, quarterly and yearly expenses such as electricity and water bills, council rates, mobile phone bill, car insurance, car registration, and other irregular expenses that may not be covered in your week-to-week budget plan.
There are a number of good mobile phone apps that can help you track income and expenses.
Choose P&I over IO repayments
If you have an investment property, you might want to think about switching from interest only (IO) to principle and interest (P&I) because interest only rates tend to be much higher than principal and interest P&I) repayments.
They also tend to be the first rates to rise when a hike is around the corner.
Golden tip: Switching to interest only because you can’t afford P&I repayments is not a good long-term strategy because you end up paying more over the life of the loan.
Clear your debts
Clear up any credit card debts and pay down personal loans including car loans.
Pay down any debts using funds you might have in a low-interest savings account.
Common mistakes to make during a rate rise
Living beyond your means
One of the most common mistakes that people make when it comes to preparing for an interest rate rise is that they spend more than they can afford.
In the short-term, this could see you miss or default on your mortgage repayments.
Over the long-term, high living expenses can affect your chances at refinancing your home loan to get a sharper rate.
Accessing your redraw facility on a regular basis
Withdrawing extra repayments you have made to youroffset facility is a better strategy than constantly withdrawing from your redraw facility.
The fees can be quite high each time you withdraw using your redraw facility, whereas an offset account typically has free withdrawal.
Setting and forgetting your home loan
Most people are unprepared because they simply get apathetic about their mortgage and forget to check their rate on a regular basis.
The fact is that the lender will not notify you when your rate has risen.
The simplest step you can take is to call a mortgage broker to find out if you’re eligible for a cheaper rate with another lender.
The best mortgage brokers are there with you even after you settle your home loan.
Are you ready for an interest rate rise?
Call on 1300 889 743 or fill in our free assessment form and let one of our expert mortgage brokers assess your situation in full.
We can guide you through the right steps that will prepare you for an interest rise, whether it is through refinancing or simply managing your home loan more effectively.