How To Prepare Your Repayments for Interest Rate Hikes
Loans and mortgages in Australia continue to be impacted by rising interest rates. The economy is yet to recover from the effects of the pandemic forcing the Reserve Bank of Australia (RBA) to increase the rate to contain the effects of inflation.
Currently, the rate stands at 2.6% after the cash rate increase in October. However, experts expect this figure to increase further in the coming months.
Increasing interest rates bear troubling news for homeowners who have recently taken on home loans on new homes or those who have mortgage payments to go on their previously borrowed home loans.
Australian homeowners, do not need to panic just yet, as the home loan interest rates are still much lower than historical rates, and by following these 11 tips on mortgage repayments, you may be able to stay on top of your home loans.
1. Review Your Budget
Start by reviewing your financial habits. Check on your spending and savings, or your income vs. expenses.
If you don’t have a periodic budget, it’s time to start documenting your finances. This can help you stay on top and make the necessary financial changes to accommodate the hiking loan rates.
Look at how much you spend on each budget category from your utilities, food, entertainment and leisure, savings and investments, and other bills. Then, identify how you can cut down on some items to create extra finances to cover your home loan repayments.
For example, if you plan to have two vacations annually, you could either reduce them to one, or explore budget travel. In other instances, you could curb your out-of-home entertainment activities such as eating at a restaurant or going to the movies with cheaper options of cooking and watching TV at home.
It can further help to analyze and improve your utility bills. You could invest in energy-efficient appliances, install smart meters to monitor and control electricity usage, switch electricity plans [e.g. for off-peak & peak charges], or limit your phone bills [perhaps by making maximum use of WiFi connections] to create an extra layer of finances to cover your increased loan rates.
It could be imperative, given the times, to have an emergency fund in your budget as well. An emergency fund should cater to at least 2-3 times your monthly budget. It supplements your current budget and is available for many unforeseen expenditures which could include the higher loan repayments.
2. Re-evaluate Your Home Loan
When your home loan interest rates go up, it may be time to review your loan options. Consult your mortgage broker or agent to understand the feasibility of your loan and its impact on your finances. Brokers can suggest home loan refinancing, a higher down payment, or improving home equity to solve your financial crunch.
With the help of a mortgage broker, you can compare and understand which solution fits your current home loan repayment potential. Various lenders offer different refinance solutions in the wake of rate hikes. It’s up to you to analyze the feedback from the experts and lenders to check if the loan still serves you well or may require some tweaking.
3. Consolidate Debt
Many Australians have other repayment commitments from additional debt like car loans, education loans, credit card payments, or other personal loans. In that case, you can consolidate your loans to ease the impact of the hiked rates.
Consolidating these loans together with the home loan reduces your repayment budget as home loans usually have the lowest rate out of all. You’ll have one financial institution absorb the other loans and recalculate your repayments based on their interest rates.
Instead of having two to three monthly repayments, you focus on making just one. Before consolidating your loan, visit a financial expert or broker to advise which financial institution to partner with and whether debt consolidation may be the right option for you.
4. Consider an Offset Account
An offset account is a savings account linked to your home loan account. The homeowner or borrower deposits their savings or salary in this account. The money in this account offsets your debt, causing a dip in the interest rate on the amount owed.
For example, if you have a home loan of $200000 and have $40000 in your offset account, the interest rate is only applicable to $160000, reducing your repayments. The other benefit of offset accounts is that the money in your account is still accessible to you and it only acts as a guarantee of the amount owed.
5. Make Extra Mortgage Repayments
Home loan interest rates may continue to rise this year. Thus, taking advantage of these ‘low’ interest rates and working on increasing your current repayments might also be a good option.
Extra mortgage repayments reduce the amount owed and shorten your repayment period. Also, they lower your interest rate charged across the loan’s lifespan.
Look for ways to increase your cash at hand and increase your repayment frequency. Take note of your loan type before committing to your extra loan repayments. Some loans, such as fixed-rate loans, attract additional fees or penalties if you have extra repayments.
Consult your loan agent and review your loan clauses before starting your additional payment plans. You can also make several lump sum repayments to offset your balance.
Using a loan redraw facility can be a vital saving account for homeowners. Some borrowers on variable rate loans choose to overpay their repayments for their withdrawal and usage later. Various lenders use different methods to allow access and withdrawal of these additional amounts.
6. Explore Fixed Interest Rates
Fixed interest rates have specific rates for the loan repayment period. On the other hand, variable interest rates have fluctuating rates based on market values. Therefore, when the interest rate rises, borrowers with varying interest loans have to adjust their repayments.
You don’t have to worry about the increased rates when you have a fixed-rate home loan. Your repayments and amount of interest remain constant until you repay your loan.
With interest rates rising, fixed-rate home loans could be better than variable-interest home loans as they may provide financial stability and certainty allowing you to manage your finances without stress. Talk with your mortgage broker about this option.
7. Utilize Your Tax Refund
Using your tax refund to offset your home loan or mortgage will help you to keep your repayments down. You can get your tax refund or bill from 1st July to 31st October.
You only need to file your tax returns with your tax agent within the period. You should get your tax refund within at least two weeks after you submit your request.
Sometimes home buyers prefer to re-invest or save this amount. But using it to repay your mortgage has numerous benefits, including lowering your interest rate and helping you to manage your financial obligations.
8. Ask for a Lower Home Loan Rate
Negotiating for a lower interest rate could help you manage hiked rates. Look at the rates for multiple lenders before approaching your lending agent for renegotiation. Ask them to match the low-interest rates to reduce your repayments and interest rates. Inquire about any additional fees or rates you will incur in the interest rate change.
Banks charge higher interest rates for long-term customers, while reserving the more competitive rates for new customers. After the negotiation, you may have a better idea of whether to stick to your current loan or consider the need to refinance your home. Talk with your mortgage broker about this option.
9. Avoid Additional Debt
Getting additional loans or building credit card debt on top of increased interest rates could pull you down financially.
Evaluate which loans are essential to renew after you complete your loan term and work on alternative financing methods. This means avoiding indulging in more loans or signing up for installment options such as Afterpay without a legitimate need. Instead, adjust your financial solutions to using debit cards and the cash available at hand.
10. Prioritize Savings
Having a savings and emergency account is critical in your financial portfolio. Always include a savings and investments tab in your budget. Find out how you can make savings through high profits or high-interest savings accounts.
Saving accounts is a cushion in case of any financial incident like loss of income or higher interest rates. In addition, having an account that provides interest over time helps counter inflation effects.
Look at how various institutions handle their savings accounts before engaging with them and evaluate if the rates match or are better off than the current inflation or interest rate to benefit from the account.
11. Pay Principal With Interest
Paying an interest-only amount should be the last resort for any homeowner as it actually increases your overall payments. When paying off the monthly interest without offsetting your principal amount, you can reduce your current mortgage repayments. It’s a temporary fix if you’re not financially stable. But, it adds to the total interest owed while also requiring you to pay off the principal amount later.
Therefore, the ideal option is to always work on paying your principal amount and interest rate to manage your mortgage repayments and home loan better in the long term.
With these tips, you can manage your mortgage repayments by lowering your interest rate, shortening your repayment period, or improving your cash flows.
Interest rates are expected to rise further in the near future so for homeowners it is best to start on your plans to keep mortgage repayments down as soon as possible.
For those looking to buy a house, it may help to buy sooner and get a competitive rate, and to reach out to a real estate agent or mortgage broker to help manage your property and home loans.