Be prepared! As interest rates move up and down, it is important to understand what drives the change and consider ways to lessen the impact on your finances. The rate of interest you’ll pay on your mortgage depends on a combination of factors. This can include the Reserve Bank of Australia’s (RBA) cash rate, your lender and the type of loan you have. Ensuring you have the right loan for your situation, is key to protecting your position and being prepared to handle any rate rise.
When working through your loan options it is important to consider the following factors:
The type of rate
Rates move up and down in line with the economic current cycle. Some borrowers prefer to fix their home loan rate – or ‘lock in’ a rate for a set period of time. If you’re considering this option, it’s important to remember that traditionally a fixed interest rate is often higher than the current variable rate. However, if rates are on the rise and you’re concerned they’ll keep going up, fixing your rate will ensure consistency in repayments each month. Where as a variable rate will continually fluctuate at the whim of the market cycle. Alternatively a split loan can give you the best of both a fixed-rate and variable-rate loan. This means that if rates rise, a proportion of your loan will be protected – minimising the impact of higher monthly repayments. If on the other hand rates fall your fixed-rate will remain higher and the variable part of the loan will fall.
The type of loan
Different loan types tend to come with different interest rates. So if your loan has a range of features, such as re-draw, offsets or early repayment facilities, you’ll usually pay a little more in interest. Alternatively, while a basic loan doesn’t have all the bells and whistles of other products the interest rate is typically lower. It is important to understand how the different features work to assess whether they are worth paying a higher rate for (See BLOG Home Loan Products 101). For example, if you’re looking to pay your mortgage down quickly or like flexibility in your repayments, it may be worth paying for the features needed to do this most effectively. Additional features are a great way to help repay your loan early, if used correctly can potentially save you interest and offset any additional cost for these extras.
Factors that influence the RBA cash rate
- A Buoying Economy
- A Shrinking Economy
- Oil Prices
- House Prices
- Global Influences and the Dollar
How to lessen the impact of a rate rise
Factor in possible hikes– Leave room for a number of interest rate rises when you assess your borrowing capabilities – this is essential, particularly with rates on the upward climb. You may have to reduce your mortgage amount slightly or purchase property that’s at the lower end of your price range as a result.
Interest only– If you’re really struggling to keep up with rate hikes, you can consider changing to an interest-only loan. While not an effective long-term strategy for owner-occupiers, it might be an option while you deal with the here and now.
Refinance– Your situation may have changed from when you first took out your mortgage – for example you’ve now only got one person in the household earning a salary. Rates between lenders are also changing dramatically in this constantly changing and competitive financial environment. A broker can compare the market and advise a mortgage that may better suit your situation.
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