After a period of historically low home loan rates, the tide is starting to turn in Australia and the lenders have followed the Reserve Bank’s lead and raised interest rates in the past three months.
On the one hand this is good news because it shows that the Australian economy is in better shape than other developed countries. On the other hand it is little comfort to home owners who have a mortgage. Therefore, it is important for every home owner with a viable rate home loan to revisit their budget and put a workable strategy in place to counteract the effects of the rising rates.
Effective Repayment Strategy for a Mortgage Loan
One very clever payment strategy is to set the monthly repayment at a higher rate than is required by the bank. For instance, if the bank’s home loan rate is 6.50%, then calculate the repayments at 7.50% or even 8.50% if the household can afford it. This has the dual effect of getting the household used to paying the higher amount so that if and when the interest rate rises to that level the household knows that they have no problems making repayments. The other benefit is that the increased amount is used to reduce the capital on the loan. For example:
Current Interest Rate 6.50%
Current Monthly Payment $2,275
Higher Interest Rate 7.5%
Monthly Payment at the higher rate $2,517
The additional $242 per month reduces the capital whilst the interest rate remains at 6.50%.
(The above example is worked on a Home Loan of $360,000 over a 30 year period.)
Other Options to Cope With the Mortgage
If making higher than normal repayments are not an option, then there are other ways that householders can try to cope with rising rates.
- Consulting a mortgage broker to ascertain if the loan product is the right one for the family and to ascertain if there are ‘cheaper’ products on the market.
- Consider moving all or part of the loan to a fixed rate for a specific period. This will give peace of mind knowing that the during the chosen period the repayments will not change. Of course there will be a cost involved in doing this.
- If paying multiple loans such as personal loans, car loans and credit card debts which are at a higher interest rate, consider refinancing and rolling them into the mortgage so that only one monthly payment at a lesser interest rate is payable.
- Consider extending the loan term to reduce the monthly payment.
Factors to Consider When Making Changes to the Home Loan
It should however be borne in mind that any changes to the home loan by way of moving to a fixed rate loan, rolling in other debts and extending the loan term could all incur costs.
With a careful look at the household budget and by consulting a mortgage professional, homeowners will be able to reduce the impact of the rising home loan rates.