Are you prepared for a rate rise?
We all know that interest rates have been going up, putting stress on those making mortgage repayments. Especially those who are about to come off a low fixed rate.
As the cash rate increases, it’s important to know how you could be affected, and whether you are on the best possible mortgage and interest rate, so you can make an informed decision and potentially mitigate the impact of further rate rises.
How to prepare for rising interest rates
Firstly, keep calm – you have buffers in place.
Interest rate increases are the exact reason why lenders use serviceability buffers. Currently, for loan approval, a lender must determine that you could still make (‘service’) loan repayments at three per cent higher than their actual market rate. This means that small, gradual increases in rates should be manageable for most.
Check out our article: Serviceability buffers explained >
However, these buffers can’t account for all of life’s changes. If you’d like to take extra steps to put your mind at ease, here are some other options:
1. Book in a mortgage review
If it’s been a while since your last review, two things have probably happened:
• Your property value has increased.
• You’ve been lowering your total loan amount through regular repayments.
These factors combined may have reduced your loan-to-value ratio (LVR) enough to refinance to a lower-interest mortgage. This may also be a chance to include or exclude loan features that better fit your current financial situation.
If you’d like to review your loan, please get in touch with your broker, or find a local Nectar broker here.
2. Look at your spending
If your expenses or spending habits have crept up since you first took out your mortgage, now could be a good time to see where you could tighten the purse strings, just a tad.
Use Nectar budget calculator >
3. Consolidate debts
Rising interest rates affect all types of lending, not just mortgages. So, if you have other debts like credit cards, vehicles and/or personal loans, you could consider consolidating them into one loan at a lower rate. You would save on repayments and offset some of the impacts of a rate rise.
Is now a good time to fix your mortgage?
There are pros and cons to taking out a fixed rate in any scenario. If you’d like to discuss a fixed loan, please get in touch.
Pros
• Peace of mind – your repayments won’t increase if the cash rate rises.
• Better for budgeting – know exactly what your monthly repayments will be and what’s left over at the end.
Cons
• Repayments won’t decrease if the cash rate falls.
• Break-fee penalties may apply for changing the loan before the term expires. These costs are usually only visible after the request to change/close the account is made and can range from nothing to thousands of dollars.
• Usually less flexibility to add features (redraw facility, extra repayments, etc) than variable loans.
Most fixed rates are for 1 to 5-year terms. Usually, when banks expect the cash rate rise, their fixed rates will be higher than their variable rates.
In a nutshell, being prepared for interest rate rises is about being comfortable with your buffer. If you’re not, get in touch with a Nectar mortgage broker to discuss your options.